George Osborne on rack over Russian

The shadow chancellor's judgment and candour were being questioned after revelations that talks took place about a £50,000 gift that would have been illegal under British law.

Mr Osborne came out with denials that were so tightlyworded that MPs felt he had unwittingly fuelled the swirl of questions about his meeting with Oleg Deripaska on board an £80 million yacht moored off Corfu.

He voiced "regret" about the storm and appeared to admit that senior Conservatives may have advised Mr Deripaska on "how to make a legal donation", perhaps through a British company he owns. "We didn't ask for money; we didn't receive any," said Mr Osborne.

But in a crucial admission this afternoon, the Tories admitted that Mr Osborne did, after all, discuss a possible donation with financier Nat Rothschild. It was raised, said Tory sources, by Mr Rothschild just before the shadow chancellor and Conservative chief executive Andrew Feldman boarded the yacht. The Tories insisted that Mr Osborne "quickly made clear" that no gift could be accepted from a foreign source. But earlier when asked to deny claims that there was a discussion about such a gift, Mr Osborne said: "People make suggestions on behalf of other people about donations to the Conservative Party, like all political parties.

"But we have very rigorous checks and make it absolutely clear that any donations must be legal."

In an extraordinary political twist, Mr Osborne's turmoil was created by one of his oldest friends, Mr Rothschild, who arranged the meeting.

The key figure, however, appeared to be Lord Mandelson, who was staying on Mr Deripaska's yacht and who was outraged when Mr Osborne gossiped about his private conversations there.

Mr Rothschild alleged that Mr Osborne invited Mr Feldman to join him on board Mr Deripaska's yacht moored off Corfu in order "to solicit a donation".

The Standard has learned that Mr Osborne was enjoying a free family holiday with his wife Frances and children-at the Rothschild family villa in Corfu when he was invited to meet Mr Deripaska. He made two visits to the yacht, Queen K, each lasting an hour: once with Lord Mandelson and the second time with Mr Feldman.

Mr Osborne claimed Mr Rothschild's account was "completely untrue" and Tory officials flatly denied that he took part in any conversations about a donation. But Mr Osborne admitted: "I certainly-regret all the fuss and the misunderstanding that has come out of the trip to Corfu." However, when the shadow chancellor faced reporters later to answer questions on TV, he appeared unable to deny that discussions did indeed take place.

He said: "A very specific allegation has been made that we solicited a donation from Mr Deripaska and I want to make it absolutely clear that we neither asked for money nor did we receive money." Pressed on whether such a donation had been discussed with any third party, he said he refused to enter into a "detailed running commentary on all the offers that are made to us".

He added: "What the public are entitled to know is whether we accept donations and whether we explain to people exactly how to make a legal donation." The latter remark appeared to refer to a claim that Mr Feldman suggested that a donation made through a UK firm would be legal. In fact, such a donation would be unlawful if it was made for the purpose of channelling funds from a foreigner.

Today's claims about Mr Osborne also overshadowed new disclosures about the Mandelson-Deripaska links, including that they had dinner in January 2005, much earlier than previously admitted and, crucially, before a decision on EU tariffs was taken.

"It is pretty obvious that this is Mandelson's revenge," said an ally of Mr Osborne. "It is nothing more than Mandelson getting up to his old tricks."

However, there was no explanation from the Conservatives about why Mr Rothschild would make untrue claims. The financier set out his allegations in a letter to the Times, in which he complained at the attention being given to Lord Mandelson. "I am surprised that you focus on the fact that one of my guests, Peter Mandelson, is a friend of another, Oleg Deripaska," he wrote.

"Not once in the acres of coverage did you mention that George Osborne, who also accepted my hospitality, found the opportunity of meeting with Mr Deripaska so good that he invited the Conservat ives' fundraiser Andrew Feldman, who was staying nearby, to accompany him on to Mr Deripaska's boat to solicit a donation.

"Since Mr Deripaska is not a British citizen, it was suggested by Mr Feldman, in a subsequent conversation at which Mr Deripaska was not present, that the donation was 'channelled' through one of Mr Deripaska's British companies. Mr Deripaska declined to make any donation." In a statement, the Conservatives denied discussing a donation "with Mr Deripaska" but admitted that a donation was discussed with Mr Rothschild. It said: "Donations to the Conservative Party were not discussed with Mr Deripaska.

"In a conversation on 18 September, Mr Rothschild suggested to Andrew Feldman that Mr Deripaska wanted to make a donation to the party through one of his British companies. The offer was not taken up. For clarity - the Conservative Party has neither sought or received any donations from Mr Deripaska nor any of his companies." Mr Osborne tried to turn the tables on Mr Mandelson by publishing every meeting he and other Tories had with Mr Deripaska and challenging the Business Secretary to do the same.

Lord Mandelson has been accused of failing to come clean about his links with the tycoon, who benefited by an estimated £200 million when the European Commission decided to lift EU tariffs on aluminium imports.

A source close to Mr Deripaska flatly denied that the billionaire initiated discussions over a donation. "He has never donated to any political party in Britain and he has no intention of doing so," said the source.