Following a week dominated by the Steelgate "cash for letters" scandal, a major debate is set to be launched about the future funding of political parties.

Dismissing claims that politicians are "panicking" over sleaze claims, Andrew Bennett, the chairman of the transport and local government select committee, has announced that MPs are to conduct an inquiry into party funding.

The centre-left Institute for Public Policy Research has also signalled that it is to investigate alternatives to the current system of regulated donations from wealthy individuals, business and trade unions.

Bennett dismisses claims that the inquiry is a knee-jerk response to the Steelgate and Enron affairs, saying that the levels of spending at the last general election had set alarm bells ringing.

"This is not a panic response to the issues around at the moment. We have planned for some time to have this kind of inquiry but the best inquiries are held when people are talking about an issue so this is a very appropriate time to be doing this," he said.

Reflecting on the £15 million limit imposed on each party at the last election, the Denton MP believes that spending is a problem and asks "how much that was spent was needed".

"The problem appears to be an issue about how political parties are spending and how they raise it. More money coming in from private companies will bring democracy into disrepute," he told ePolitix. "The cap [on election spending] could effectively be ratcheted down so we don't need huge donations."

Despite claims that the prime minister is warming to state funding, Bennett says he can see "the danger" of asking taxpayers to bankroll political parties.

He says the old model whereby trade unions financed Labour and big business supplied cash to the Conservatives was no longer the case. "Once it was clear that Labour was largely financed by trade unions and the Tories by business. Both parties are now sniping at each others donors," he said.

The committee's co-chairman, Gwyneth Dunwoody, says that she personally believes that state funding is "one of things we should look at"."I think it would certainly be a lot more straightforward for the electorate and we can not continue with a situation where political parties, although they are quite open about finances, are still faced with problems because of the way they are funded," he said.

"I think we should urgently be looking at the different forms of funding."

The Crewe MP also argues that the shift in donations from unions and companies to individual wealthy donors is feeding the public's perception of "sleaze".

"I personally think it is difficult if there are lots of one-off donations from companies which mislead the public into thinking people are trying to buy influence," she told this website.

Bennett believes that unless action is taken prime ministers, whatever their political complexion, are placed in "an impossible position".

"Any prime minister is in an impossible position. If he says, 'I don't know anything about donations and I could not give space for people who donate' it is difficult to raise money. If he does know about them, he gets criticised. It's a dilemma and it needs to be faced up to," he said.

The committee has already announced that it is take evidence from Electoral Commission chief, Sam Younger, who also is set to hold his own investigation in to the issue "some time in the future".

The linkage between "sleaze" rows public cynicism and party funding was acknowledged by IPPR director, Matthew Taylor, who is to launch an inquiry into party funding.

The think tank, which is renowned for "flying kites" on behalf of Downing Street, claims the inquiry was planned two weeks ago.

"Each time there is a row over the link between a private funding and political parties, it serves to deepen people's cynicism of politicians and politics," said Taylor.

"This has serious implications for democracy and is a concern to all the main political parties. Any changes recommended must be fair to both political parties and funders and must take into account the views of the public."

The IPPR says that "there could be huge advantages to increasing public subsidy of the political system" but stresses that "there is a need for rigorous research and a thorough investigation of the potential hurdles and disadvantages".

Rachel O'Brien of the IPPR warns that the debate tends to revolve around the "very detailed obsessions of both the media and politicians" and urges deeper public involvement in the discussions about future funding.

"The issue is contradictory, on the one hand people are getting fed up with politics and on the other saying 'you pay for it now'. You can not have the debate unless you test public opinion and really get to the bottom of what people really do want," she told ePolitix. "The government can not lead the debate, it must be led by civil society."

"When the government looks at public participation, which is all the rage now, it tends to look at polling, it tends to look at research which gives lots of quantative information and it doesn't look at qualitative issues. Partly because it is worried about the accusations around focus groups," she adds.

Both inquiries will be viewed as important in determining "a consensus" on the issue, regarded by Downing Street as crucial if state funding for political parties is to be increased

Number 10 has already indicated that the cabinet has begun discussions about the future funding of parties, although insiders say ministers are reluctant to be seen leading the calls for state funding.