The Conservative leader has called for action to ensure party funding comes from a wide base of smaller donors.

Iain Duncan Smith indicated the chancellor should look at tax relief for small donations to encourage more people to fund party activities.

With the government thought to be considering some form of state funding for parties, Duncan Smith appeared to soften his party's line on opposing the use of public funds to aid parties.

But he said that Conservative finances were in a "good state".

Speaking to Sky News' Sunday with Adam Boulton programme, he said most of the Tories' money now came from smaller donors rather than multi-millionaires.

"We published our accounts a few weeks ago, there wasn't even a single bit of comment on it, probably because they were in such a good state," he said.

With all parties keen to raise cash ahead of next year's elections to the Scottish parliament and Welsh assembly, Duncan Smith said that more people should be encouraged to donate.

"I think that's the future for political parties, which is to get to the limit of £5000, which is the limit beyond which you declare, and encourage people below that to donate.

"I don't want to give advice to anybody, but the truth is if the chancellor is prepared to take up those considerations and look at it, I think lots of people who want to give to political parties, would find themselves encouraged to do so."

He noted that the issue of assisting donations through tax relief was one idea that had been raised.

"Now the chancellor won't even look at that at the moment. That's one of the solutions for Labour, to actually encourage people to donate small amounts of money, to have many more donors," he said.

Asked if state funding could help Labour break its link with the unions, Duncan Smith said: "Labour's personal problems with the trade unions are their own. They are hugely financed by the trade union moment and they are hugely influenced by them."

He said Labour had made unions more powerful "and it seems that the crocodile is coming out of the water and getting hungry".