With Labour's funding once again in the spotlight, the party's treasurer has expressed concern over the donation by the Express newspapers baron.

Jimmy Elsby said on Monday that he was "not happy" that Labour had accepted a £100,000 donation from Richard Desmond, who made his fortune through publishing adult magazines.

Elsby, assistant general secretary of the TGWU union, said he hoped that the party's creation of a fund-raising committee to vet donations would prevent a repeat of the affair.

He joined a number of other senior Labour figures who had expressed their concern at the donation including Clare Short and Tessa Jowell.

With Labour's finances under scrutiny and suggestions that links with the unions could be cut, the party treasurer's comments could not have come at a worse time.

"I am not happy with that particular donation, but it is not illegal," Elsby said.

Elsby said the committee set up by Labour, which includes senior ministers, to investigate big party donors would halt a possible repeat of the Desmond donation.

"What the Labour Party has done is set up a fund-raising committee to make sure that these donations are screened and make sure that we don't get these kinds of donations in future," he said.

The row comes amid claims that the party is in the red by millions of pounds and is considering direct funding appeals to union members rather than relying on the organisations.

The government's relations with some unions, particularly those representing public sector workers, are currently strained following a series of strikes and rows.

Several cabinet figures, including John Prescott and Robin Cook have resigned from the RMT after it demanded more radical action over the railways.

Elsby denied that relations with the trade unions were set to come to an end.

"The trade unions will continue to donate to the Labour Party, not on the basis of getting favours," he said.

"The relationship between the unions and the Labour Party has always been bumpy. The Labour Party has a job to do for the electorate that voted them into government and the unions have a job to do in representing their members."

His comments were backed up by party chairman David Triesman who admitted that Labour had debts of around £6 million.

Some press reports at the weekend had claimed that the debts would restrict Labour's ability to contest elections in Wales and Scotland.

"We have financial challenges to face. The newspapers seem to think there's nothing else that preoccupies us," he said.

Triesman told Labour activists on Sunday that a solution would be found to the cash crisis.

Following the costs of last year's general election and a series of cuts in party funding by unions, a draft budget to be presented to the party's National Executive Committee this week warns that Labour is "in the worst financial position it has ever been".

At the beginning of this financial year the party's debt was £6 million, but could reach £8 million when further unpaid bills are added to the total.

But despite fears that the cash crisis could hamper the party's ability to fight next year's elections to the Scottish parliament and Welsh assembly, Labour said it would still be campaigning for victory.

The budget document, which was leaked to BBC1's On the Record, is also reported to warn: "Sizeable repayments to the bank are expected in 2003. This was not the case in 1999 and represents a significant challenge."

The GMB, the Communication Workers' Union and the Rail, Maritime and Transport union have cut funding to Labour in recent months, causing a cashflow headache for Labour officials.

"It is true that there are those kinds of problems, but we are making difficult choices and we are working our way through them," said Triesman.

He also said the party had to increase membership as it prepared to fight the "very tough" electoral battles ahead in 2003.

"Our challenge is to renew our party, to strengthen our structures, to redouble our campaigning efforts and remain open to new ideas and thinking."

There was also some relief for party officials from Derek Simpson, the new left-wing joint-head of the Amicus trade union, who said he would remain a supporter of Labour and played down suggestions he could cut contributions to the party.

"Nothing in my election material suggested any change whatsoever and let me make it clear - I'm a member of the Labour Party and a supporter of the Labour government," he told the BBC's Breakfast with Frost programme.

"My concern will be about policy, not about existence. I intend to ensure the Labour government continues. I intend to applaud it for the things it does positively but I also intend to see that it understands the needs of our members."