Short: department involved

The opposition has called for an inquiry into allegations that the government helped clinch a $100 million loan for the Labour donor and steel magnate Lakshmi Mittal.

The call followed revelation that the Department for International Development (DFID) gave its backing to the loan, used to assist the bid for a lucrative Romanian steel contract by Mittal's LNM Group.

It is understood that Clare Short's department led calls for the European Bank for Reconstruction and Development loan to be approved.

On Sunday, the Tory leader Iain Duncan Smith demanded an inquiry into the claims.

"All through the week we've had differing stories - now an inquiry is necessary," said Duncan Smith.

"What I do have some concerns about is a party supporting a company that has nothing to do with Britain, that clearly did have links with that party, and no other reason for supporting it can be found."

Officials

But a spokesman for DFID insists that the move was engineered by civil servants and did not come from ministers.

Officials from within the department were said to believe the Sidex steel deal was "a very good project".

A spokesman for the European bank insisted that the loan, which was one of the biggest handed out last year, was awarded in line with "proper procedures" but conceded that the bank had not widely publicised the cash award.

The UK's contribution to the loan is thought to be around £6 million.

Last week the prime minister was forced onto the defensive after it emerged that he had written a letter of support for Mittal's bid to his Romanian counterpart.

Cash

Mittal, who has very limited business interests in the UK, met Blair at a Labour fundraising reception held by Lord Levy.

Donations returns show that he has awarded £125,000 to the Labour Party.

Lord Macdonald of Tradeston, the Blairite Cabinet Office minister, stood by the government's decision, blaming the current controversy on media bias.

"I think we are facing an unprecedented attack from the Tory press. They're setting an agenda which is to try to discredit us and to undermine the issues on which we fight, which are the issues that the people care about," he told Sky News.

The former sports minister, Kate Hoey, has warned the government that its reputation is being damaged by the claims.

"None of us can like what we're reading today about this, and of course there will be some arguments why it's happened, but I think there is a feeling that there's something not right about this," she told GMTV.

Her intervention came as an opinion poll published in The Sunday Times showed that 60 per cent of people regarded Labour as "sleazy or disreputable".

The poll also revealed that most people believe that Tony Blair is prepared to do favours for businessmen who donate cash to Labour.

Margaret Beckett, the agriculture secretary, said it was "sad that people think that" and claimed the party had to do more to get its message across.