British lawmakers start probe in party funding row

LONDON, May 16 (Reuters) British lawmakers today started a probe into allegations that Tony Blair's Labour Party offered state awards to businessmen in return for funding, one of a string of scandals that has damaged his image.

The ''cash-for-peerages'' row, along with the release of more than 1,000 foreign prisoners without proper checks and news that Blair's deputy had an affair, helped contribute to a drubbing for Labour in May 4 local elections.

The accusation is that Blair's office nominated millionaires for seats in the House of Lords -- parliament's unelected upper chamber -- in return for loans to Labour, or funding for new schools. A 1925 law made selling seats in the chamber illegal.

The probe is running parallel to a police inquiry.

Blair and Labour will be watching the timing of the police probe closely, aware a damning verdict in the run-up to Labour's annual party conference in September could undermine the prime minister's already precarious position as party leader.

Blair has said he will not seek a fourth term and pressure is mounting on him to hand Labour's leadership to his expected successor, finance minister Gordon Brown.

Jack Straw, leader of the government in parliament's lower house, said today convincing the public that individuals were not buying seats in the Lords or influence was essential.

''It's plainly very important that people should be able to trust the system of party funding because trust in politicians, for a variety of reasons, is too low and it needs to be improved,'' he told BBC Radio.

''MAJOR, ONGOING TASK'' The funding row blew up in March when Labour said it had received nearly 14 million pounds in loans from 12 businessmen to help bankroll its third straight election win.

Some of them were later nominated for seats in the House of Lords, which for decades has been an outlet of patronage and favour.

Some of the donors also gave financial backing to Blair's flagship schools programme, known as city academies.

Labour has denied ''selling'' House of Lords seats, known as peerages, but the scandal is embarrassing for Blair, who pledged to eradicate sleaze when elected in 1997.

Police at London's Scotland Yard yesterday said the inquiry was just getting under way and was a ''major and ongoing task''.

''Significant progress has been made in the inquiry to date, although in many ways the investigation is still at a relatively early stage,'' said Deputy Assistant Commissioner John Yates.

Yates said police had interviewed several witnesses and identified areas that required ''further detailed examination''.

He asked lawmakers to delay questioning witnesses key to the criminal probe until after the police had seen them.

A former adviser to Blair's government has been arrested in the probe.

Lawmakers today took evidence from Gus O'Donnell, the head of the civil service, and members of the House of Lords Appointments Commission -- not seen as key witnesses in the criminal investigation.

Reuters DKS RN1723