Killer e-mail sends Blair into panic over cash for honours row

A senior Minister said a 'black cloud' had descended over Downing Street at the growing realisation that the Prime Minister and his closest allies face the risk of being prosecuted over the affair.

The change of mood came as it was claimed that police had obtained a No10 'killer e-mail' which allegedly implicates Mr Blair's close ally and chief fundraiser, Lord Levy.

The e-mail, sent by Downing Street Chief of Staff Jonathan Powell, purportedly on the subject of honours, says: "ML (Michael Levy) will not be happy about this."

The suggestion is that the e-mail is the first piece of evidence that Lord Levy may have had a say in honours. Downing Street refused to comment on the e-mail.

When questioned by police, Lord Levy said that while he raised millions of pounds from rich donors, he had no say in peerages.

He says those decisions were taken by Mr Blair. In addition, The Mail on Sunday has been told that when he is questioned by police, Mr Blair intends to take legal advice from law firm Kingsley Napley, which helped Chilean dictator General Pinochet avoid extradition from the UK on torture charges.

Senior Kingsley Napley lawyer Stephen Parkinson formerly worked for Attorney General Lord Goldsmith, and advised Mr Blair before he gave evidence to the Hutton Inquiry into the death of Ministry of Defence weapons expert Dr David Kelly.

When the police investigation was first launched, some Ministers said the officers were merely going through the motions.

They have been rocked at the persistence shown by the inquiry leader, Metropolitan Police Deputy Assistant Commissioner John Yates. Sources close to Mr Yates say he has indicated he intends to interview Mr Blair under 'criminal caution' - which implies Mr Blair is being treated as a potential suspect.

The threat has caused fear and fury in Downing Street. Mr Blair is now said to be 'very worried' that he could be implicated as a result of the vast quantity of evidence obtained by police.

"No one took the inquiry very seriously at the outset, and no one thought the PM would be in any difficulties,' said a senior Minister.

"But as the weeks have gone by, the police have become more and more determined.

"We don't know what they have got, but the mood in No10 has changed. It doesn't look good."

Mr Blair's gloom is said to be shared by Lord Levy. A senior politician who spoke to him recently said: "He was in a bad way. It was like he was saying, "My life is in ruins, it is all so unfair."'

The inquiry was launched after it was revealed that four Labour donors who lent large sums to the party in unpublicised loans were subsequently nominated for peerages by Mr Blair last year.

The Lords committee which vets peerage nominations then blocked them.

The police have also interviewed Tory leaders over claims that they also effectively handed out peerages in return for donations.

Mr Yates is said to be more confident than ever that he has firm evidence that proves the award of peerages is linked to donations.