The party funding watchdog has rapped Labour over the late declaration of cash gifts worth over £2 million.

The Electoral Commission is to investigate the "serious" breach of election law which led to Labour failing to declare over a third of the donations it received in the first six months of 2002.

"The Commission regards the failure to declare donations on time as a serious matter," said commission chief Sam Younger.

"In accordance with our usual procedure we will examine with the parties concerned the reasons for the late submissions before deciding what further steps might be appropriate."

Labour failed to declare on time cash worth £236,952 in the first quarter of 2002 and £1,815,549 in the second quarter - most of the donations came from trade unions.

The late declarations explain why Labour fell behind the Tories when the last set of figures were published in August.

Labour's largest individual donation in the third quarter of this year was £100,000 from City stockbroker Charles Peel.

Peter Facey, director of the New Politics Network, accused Labour of "misrepresentations".

"This makes a nonsense of the rules and procedures the Labour Party themselves devised. Their failure to declare over a third of the cash they received seriously undermines the transparency in funding practices the 2000 legislation was designed to create," he said.

"Misrepresentations of this magnitude are bound to undermine public confidence in party funding practices yet further, and fuel suspicion."

Conservatives also failed to declare over £3000 during the same period

And the Greens were late in notifying £2545 in financial donations in the second quarter of 2002.

Late donations have now been added to the register.

The Political Parties, Elections and Referendums Act 2000 requires registered political parties to submit quarterly donation reports to the commission.

Submissions must include all donations over £5000 to main political party offices and over £1000 to constituency or local party offices.

"Failing to submit donations reports can have serious implications," warned the watchdog.

In the third quarter of 2002 the main three political parties received £4,734,804 in cash.

Labour Party gained £2,788,988, the Conservatives received donations of £1,780,038 and the Liberal Democrats received £165,778.