Police brief UK lawmakers on party funding row

LONDON, July 13 (Reuters) The police chief heading a probe into political party funding briefed British lawmakers today amid growing speculation Prime Minister Tony Blair may soon be questioned by detectives.

Police are investigating allegations that state honours were awarded in return for cash in an escalating row that has damaged Blair's standing and increased calls for his resignation.

Deputy Assistant Commissioner John Yates went behind closed doors to brief members of parliament on a committee which scrutinises the government on the investigation's progress.

The probe came one step closer to Blair on Wednesday when Lord Levy, the chief fundraiser for his ruling Labour Party and one of the prime minister's closest allies, was arrested.

Michael Levy, 62, denied any wrongdoing and accused the police of using their arrest powers ''totally unnecessarily''. He was released on bail without charge pending further enquiries.

''The waters are lapping around the prime minister's ankles,'' Scottish nationalist leader Alex Salmond said after the arrest.

Blair faced a barrage of damaging headlines on Thursday about the row reaching the door of his Downing Street residence.

''Blair faces police quiz,'' said the Sun tabloid. ''Police quiz Blair next,'' declared the Daily Mail.

MORI pollster Robert Worcester told Reuters: ''I think it is one of the many nails in Blair's coffin. His authority is dissipating day by day and his loyalists are fewer and fewer. The Praetorian Guard is being depleted.'' After Levy's arrest, bookmakers William Hill shortened their odds on Blair quitting this year to 2-1 from 11-4.

The Labour party came under pressure after it said it had received nearly 14 million pounds of loans from 12 businessmen, some of whom were nominated for seats in Britain's unelected upper house of parliament.

Britain has a complicated system of awards and decorations. A law was introduced in 1925 making it illegal to sell seats in the upper chamber, the House of Lords, after government abuses.

Police have been investigating all parties in Britain after the row broke out in March. Labour denies the allegations.

A report from the committee which scrutinises the government said on Thursday Britain should reform the honours system to prevent abuse. The deputies called for greater transparency to deter politicians from using it to reward their favourites.

REUTERS SHB PM1556