Blair denies sleaze, challenges party rebels

LONDON, Mar 16 (Reuters) Tony Blair today promised to change party funding rules in a bid to quell a growing sleaze row and dismissed charges that he had lost control of his Labour lawmakers after a revolt over school reforms.

Blair had to rely on opposition votes to get his schools bill past a key parliamentary hurdle yesterday evening -- a damaging result that was compounded by a cash-for-favours spat.

The sleaze row potentially damages the image of a prime minister whose popularity has suffered since the war in Iraq.

Labour treasurer Jack Dromey has opened an inquiry into loans to the party of millions of pounds, about which he was not informed. The lenders were offered seats in the House of Lords.

Blair denied he had given peerages in return for cash but said he would look at changing the rules on party funding and removing himself from the process of nominating peers.

''Anyone appointed should merit appointment independently of financial support,'' he told reporters at his monthly news conference. ''I'm completely satisfied there's been no breach whatsoever of the rules.'' The latest allegations follow a high-profile row over financial links between Culture Minister Tessa Jowell's husband and Italian Prime Minister Silvio Berlusconi.

PRESSING ON Blair vowed to press ahead with reforms to schools, hospitals and other services that anger sections of the ruling Labour Party.

But he promised to ''engage'' with his critics in a bid to avoid clashes in the future.

''There is a real worry ... about the direction of travel but I'm also passionately committed to those reforms,'' he said.

But he added: ''I have got to be in a position where I can at least engage those party members.'' He and his ministers would debate the issues across the country in coming months, he said.

The education bill, which seeks to give schools more freedom, only passed thanks to Conservative Party votes, despite Blair's working majority of 69, after 52 Labour lawmakers rebelled.

Left-wing Labour lawmakers called the vote a watershed, saying Blair had lost his moral authority to lead the party.

Analysts said the result, while not a killer blow, was damaging.

Blair's authority has inevitably waned since his majority was slashed at last year's election and since he said he would not stand in the next poll, due by mid-2010, analysts said.

He has been defeated in key votes on anti-terrorism plans and religious hatred laws since the election.

The fact Blair could not muster enough Labour votes to pass a bill that is central to his third term agenda gives more ammunition to those who want a swift handover to his expected successor, finance minister Gordon Brown.

The true test for Blair will come in local elections in May when Labour followers will want to see whether he can still work the electoral magic that won him three straight terms -- or whether he has become a liability.

REUTERS OM KP2126