A limit on the size of donations to political parties could be introduced, the Electoral Commission has announced.

Launching a consultation on the thorny issue of party funding, the elections watchdog said there was "continuing public concern" about the possible influence of large donors.

The move follows recent controversy surrounding £8.5 million donations to Labour by billionaire peer and minister Lord Sainsbury.

The Tories' reliance on major donors such as businessman Lord Ashcroft and spread-betting tycoon Stuart Wheeler have also led to criticism of the current system.

Announced on Wednesday, the review will examine those concerns and seek to identify whether new arrangements could better serve the democratic system.

The inquiry will also focus on state support - which runs to £100 million in an election year - received by the main political parties.

"Parties need to be adequately funded to play their part in the political process and the way in which they obtain those funds has implications for the health of our democracy," said Sam Younger, chairman of the commission.

"Getting the balance right between public and private funding raises fundamental issues and we are therefore keen to consult widely."

By the end of this year, the commission will begin a series of public hearings to discuss the issues in more detail.

It will then submit its conclusions to the government by summer 2004.

Submissions to the consultation should be sent to the commission by September 12.