The elections watchdog has signalled that the law on political donations may need to be overhauled after prosecutors dropped an investigation into Peter Hain's campaign for the deputy leadership of the Labour Party.

The Crown Prosecution Service announced no charges would be brought because it could not prove who was responsible for the late reporting of more than £100,000 of donations to Hain4Labour.

Mr Hain, who quit the Cabinet when Scotland Yard launched a six-month inquiry into the affair, said he was "pleased" to have cleared his name.

But the Electoral Commission, which had referred the matter to police, stressed there was no question that donations had in fact been declared outside the legal timeframe. It insisted there needed to be more "certainty" in future about where the responsibility lay for such lapses.

Mr Hain became the first member of Gordon Brown's Cabinet to resign when the Metropolitan Police announced in January it was investigating alleged offences under the Political Parties, Elections and Referendums Act (PPERA). The Act was brought in by Labour in 2000 to clean up the financing of political finances.

The CPS stated that "Mr Hain did not report all regulated donations to the Electoral Commission within the 30 days stipulated by the Political Parties, Elections and Referendums Act 2000 (PPERA)". But it said that it had found it impossible to prove a criminal breach of the Act.

Mr Hain, who still faces further scrutiny from the Parliamentary standards watchdog, indicated he would be ready to return to the Government, if asked. The Neath MP, was Secretary of State for Work and Pensions, and for Wales when he resigned after a long and successful career in the Labour Government.

The Electoral Commission announced it would be reviewing the implications of the CPS's decision, saying it might require a change in the law.

"The law requires that political parties and politicians report donations in full and on time," the watchdog said in a statement.

"This is important to ensure public confidence in the democratic process. The Electoral Commission's role is to make sure the rules are followed."

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