Levy: I'm not going to swing for Tony Blair

The Labour peer is furious that he has become the prime suspect.

And he is ready to defend himself by arguing that Mr Blair, not him, should be made to take full responsibility for the affair.

• Timeline: How the funds scandal unfolded

He is said to be prepared to "do whatever it takes" to defend his own reputation.

"He said he is not going to swing for the Prime Minister. He is not prepared to take the rap for what has happened," said a former Cabinet Minister who has discussed the matter candidly with Levy.

The development came amid reports that one of the Downing Street suspects at the heart of the scandal has been "singing like a canary" to police to get themselves off the hook.

Friends of Levy say he is "outraged" at the way he has become the main target of the police investigation into the way Labour offered peerages to millionaires who made loans to fund the party's General Election campaign in 2005.

Publicly, he insists he is still loyal to Mr Blair.

But privately he is feeling enormous strain and is ready to point the finger of blame at the Premier if his protestations of innocence are rejected.

Levy has told friends that he repeatedly warned Blair against accepting secret loans, which were concealed from the Lords committee that vets peerages, instead of donations, which are declared.

Crucially, Levy says that Blair personally overruled him and gave orders to obtain the loans regardless.

In addition, Levy stresses that the Prime Minister decided which of the donors should get peerages.

"The only person who awards peerages is the Prime Minister," said Levy. "I never discussed it with him."

The apparent falling-out between the two men could have major implications as the police investigation reaches its climax.

Labour insiders believe the police may be trying to drive a wedge between them to obtain evidence they believe has been hidden from the authorities.

This is thought to be why police ordered a news blackout when they interviewed Mr Blair for a second time nine days ago.

The meeting remained secret until after they had interviewed Lord Levy a second time on Wednesday.

Mr Blair was interviewed as a witness, indicating he is not likely to face charges, but Levy was arrested on suspicion of conspiracy to pervert the course of justice. Anyone convicted could face a long prison sentence.

There is also considerable tension between Lord Levy and Mr Blair's chief of staff, Jonathan Powell. Mr Powell has been interviewed twice, once under caution, and it is thought he could face a third interview and may even be arrested.

Having set out to investigate whether Labour effectively sold peerages in return for party loans, the focus of the investigation has switched to an alleged cover-up.

It is said that secret Downing Street emails stored on a secondary computer system used by Mr Blair's aides may have been destroyed in an attempt to hide key evidence.

Friends of Lord Levy are also concerned at the effect the scandal is having on him.

He has tried to maintain a characteristically jovial front, even turning up at a fancy-dress party in a hat with his nickname, Lord Cashpoint, emblazoned across it.

But away from the public glare, it is a different story.

He has confided to friends about the "intolerable pressure" on him, telling one peer: "I can't sleep and my wife can't sleep."

A spokesman for Lord Levy said: "There is no wedge between Lord Levy and the Prime Minister.

"Lord Levy is not guilty of any wrongdoing whatsoever. He was never in favour of loans and the decision to obtain them was taken by the Prime Minister because there was no alternative before the last Election. Lord Levy has always preferred donations."

The spokesman stressed: "Lord Levy is still good friends with the Prime Minister and is still loyal to him.

"He thinks the Prime Minister is a good man who is doing a brilliant job for Britain and is proud to have worked with him."