Former cabinet minister Peter Mandelson has warned that high profile "cash for access" rows have irreparably damaged the current system of party funding.

Speaking after new figures showed that donations to the Labour Party had slumped over recent months, the Hartlepool MP warned that party politics has to "be paid for in some way".

Suggesting that high profile donors had been put off by the media's onslaught, Mandelson said there was a clear choice to be made between private donations and state funding.

"You have to ask how long will this continue ... if this sort of pressure is exerted on individuals every time they make a donation," he told the BBC.

Warning that donors are being "torn to shreds" by "unsubstantiated allegations", Mandelson questioned how many businessmen would now be prepared to donate cash to political parties.

He also warned that well-financed political parties were vital in a healthy democracy.

"Elections need to stimulate interest, they need to mobilise the involvement of people, they have to get arguments going and get people along to the polling booths," he said.

"But you cannot at the same time complain about people abstaining from the election and not getting involved and complain about the efforts of political parties making and stimulating interest in that election."

"We want a political system in which we have not just one but a range of political parties which have the practical and financial means to put up candidates to offer choice, put forward a manifesto of policies on which all people can vote," he said.

The former Northern Ireland secretary's comments came as the latest donation figures revealed that Labour's income from donations has gone into steep decline.

In the three months to June, the party received just £591,000 - which included a £200,000 donation from the theatre impresario Bill Kenwright.

Over the same period the Conservatives received nearly £2 million - with over £1 million through the state-funded system of Short money.

The prime minister, who was initially hostile to state funding, is now said to be warming to the idea. But he has made clear that voters will only accept state funding if there is a cross-party consensus on the issue.

Whilst the Tories have supported calls for individual donations to be exempt from tax, the party has signalled it will oppose any wider move towards state funding.