Labour mired in sleaze claims as Scots leader quits and MPs are accused of homes tax-dodge

The Government faced the nightmare prospect of another by-election humiliation as it
was rocked by three damaging new setbacks:

• The resignation of Scottish Labour Party leader Wendy Alexander, sister of Mr Brown's Cabinet ally Douglas Alexander, for failing to declare donations to her leadership campaign.

• The resignation of Glasgow East Labour MP David Marshall – triggering the potentially embarrassing by-election – amid allegations that he wrongly used his Commons expenses to pay members of his family.

• Claims by a Tory politician that more than 100 MPs are using their Commons second-home allowance to dodge capital gains tax.

Wendy Alexander announces her resignation as leader of the Scottish Labour Party today

The downfall of Ms Alexander is a personal blow for Mr Brown. Along with her brother, the International Development Secretary, she was a key player in the Scottish political 'mafia' who helped Mr Brown plot his way to becoming Prime Minister.

Ms Alexander's resignation, which will trigger the second Scottish leadership change within a year, followed a ruling by the Scottish Parliament's Standards Committee that she should be suspended from Holyrood for one day when the next session starts in September.

The committee ruled she had broken the law by not registering donations during her campaign to replace Jack McConnell as First Minister last summer. Donations above £520 must be registered as gifts within 30 days, which Ms Alexander failed to do.

Mr Brown praised Ms Alexander's 'oustanding' contribution to Labour, and in a letter to her said: 'I understand you do not want to see the work of the party overshadowed and attention diverted because of the decisions of one committee of the Scottish Parliament.'

Knives out: MP David Marshall is standing down but questions remain on his expenses

While her resignation was damaging to Mr Brown, it did not come as a complete surprise. However, the by-election triggered by the shock resignation of David Marshall could cause the Prime Minister much more difficulty.

Friends of Mr Marshall said he was stepping down because of health problems. But Labour figures said privately that the decision was prompted by Mr Marshall's alarm that he was about to become embroiled in allegations about payments to members of his family from his Commons expenses.

Mr Marshall had a 13,507 majority over the SNP at the last Election. But given the backlash over Ms Alexander's scandalous exit, combined with Labour's continuing woes, the prospect of an SNP victory is not impossible. But they would need a 22 per cent swing.

On Thursday, Labour was pushed into fifth place in the Henley by-election, behind the Greens and the BNP.

Meanwhile, Labour MP John Mann has sparked a new row over Commons expenses by alleging that many MPs are claiming second-home allowances on expensive properties, then declaring them as their main home when they sell them to avoid capital gains tax.

Bassetlaw MP Mr Mann said: 'This is the really big fiddle and one that is quite legal. This loophole should be closed.

'The main home should only be the one defined by HM Revenue.'