The move came only days after The Times disclosed that a senior Labour figure had told a businessman nominated for a peerage to hide that he had lent the party £250,000.
The arrest brings the most serious parliamentary corruption investigation in 70 years to Tony Blair’s doorstep and prompted speculation at Westminster last night that the Prime Minister would also be questioned. Downing Street said last night that it had no idea whether Mr Blair would be questioned.
Lord Levy, nicknamed Lord Cashpoint for his role in raising millions of pounds for new Labour, was arrested at lunchtime yesterday and questioned for several hours at a Central London police station.
Whitehall sources said that he was arrested because of a failure by senior Labour officials fully to disclose correspondence regarding loans accepted by the party and peerages offered in 2005.
“It appears that the voluntary process has not worked, and that is why the arrest took place,” a source said.
Prosecution sources said that the arrest of Lord Levy was part of the police process and would not necessarily lead to charges. In a statement Lord Levy accused police of using their arrest powers “totally unnecessarily”. A spokesman added: “He vigorously denies any wrongdoing.”