'Labour party helped lawyers arrange secret donations' claims Labour official

It is said that "middle ranking officials" within Labour drew up an arrangement with Newcastle-based solicitor John McCarthy acting for the millionaire property developer in 2003.

Scotland Yard is investigating how Abrahams was able to channel £650,000 through third parties to keep his name from regulators.

But last night sources close to the party said that while officials realised third-party donations were frowned upon, they believed they were acting within the law and - with the help of McCarthy - simply exploiting a "loop hole" in the system.

It is understood they believed Labour's recently passed legislation, the 2000 Political Parties Act, was a means of cheating the system, so as not to reveal Abrahams' identity.

Mr Abrahams suggested at the weekend that around 10 party figures were aware of the practice - renewing speculation about who knew about the donations within Labour.

Labour general secretary Peter Watt quit last week after admitting he was aware of the system being used - but insisted he believed it did not breach funding laws.

Citing "sources close to the party", the Guardian said the arrangements with the third-party donors were designed to ensure Mr Abrahams' associates had to pass the money to Labour and that they would be tax-exempt "gifts".

Lord Triesman, who was general secretary until December 2003, has said he was "completely unaware" of what was being done and would have stopped it immediately if he had been informed.

But questions are now bound to be raised over which side the idea originated from and whether it was the Labour party who initially approached Abrahams.

A Labour party spokesman said: "We cannot comment on this because of the ongoing police and internal investigations into the matter. This will all be examined during the inquiry."

Prime Minister Gordon Brown has denied any knowledge of the use of proxies and launched an internal inquiry into why the £650,000 of donations were "not lawfully declared".

The news comes after Mr Brown made a fresh bid to put the controversy behind him by switching the focus to the wider issue of party funding reforms.

At question time in the Commons he challenged the Tories to return to talks on reforming the system of funding political parties.

However Conservative leader David Cameron made clear that he would not do so unless the trade union's backing for Labour was on the table - something the party has been determined to resist.

Mr Brown, in turn, made clear that he would continue to press for a cap on donations at both national and local level, which the Tories oppose.

The Tory leader said at the weekend that it "beggars belief" the PM was not aware of Mr Abrahams' arrangements.

Mr Abrahams' spokesman had no comment last night on the latest allegations.