The fight between the Metropolitan Police and Mr Blair's inner circle came as Deputy Assistant Commissioner John Yates was to meet senior MPs in private to discuss the progress of the probe.

The arrest of Lord Levy, Labour's chief fundraiser who secured the controversial £14 million worth of undeclared loans for the party before the last election, stunned Westminster.

His solicitors issued a statement saying he was more than happy to co-operate with the inquiry and was surprised and angry the police used their powers of arrest when he turned up to be interviewed at a London police station.

Lord Levy was being interviewed by detectives again today.

He answered bail this morning and was being interviewed at a London police station, believed to be Colindale.

Some Labour MPs think it is no coincidence the arrest came as Mr Yates was preparing to meet the House of Commons Public Administration Committee to update them on the matter.

The all-party group has agreed not to question key witnesses while the investigation was proceeding, but has warned that if it doesn't see signs of progress it will break the agreement and go-ahead with a hearing.

Mr Yates was expected to tell them that the probe could go on till September as officers from the Met specialist crime directorate sifted through documents obtained from Lord Levy yesterday.

They are also using specialist software to go through e-mails between Labour and potential donors including tracking down those that have been deleted.

Lord Levy was the second person linked to Labour to be arrested and bailed without charge, following headmaster Des Smith's interview after he claimed that supporting Mr Blair's pet city academy projects in England could guarantee a peerage.

The investigation by the police under the Honours (Prevention of Abuses) Act 1925 and the Political Parties, Elections and Referendums Act 2000 is a result of claims that Labour donors and lenders were being nominated for peerages of a result of their financial generosity.

Three days ago it was claimed that Lord Levy had told one of the four lenders to Labour, curry tycoon Sir Gulam Noon, that he need not declare the loan to the committee vetting his nomination to become a member of the House of Lords.

Despite Downing Street's denials that Mr Blair would be investigated, opposition politicians claimed it was now inevitable.

Tory Shadow Home Secretary David Davis said he expected Mr Blair to be questioned in person.

He said: "The police are clearly taking this seriously. , It must be pretty worrying for the top ranks of the Labour Party."

SNP leader Alex Salmond said: "Lord Levy is Tony Blair's personal friend, his bag man, his fundraiser, his personal envoy to the Middle East.

"It is inconceivable that Lord Levy could be up to anything - if indeed he was up to anything - without the knowledge and consent of the Prime Minister.

"I think, therefore, we can say that the waters are lapping around the Prime Minister's ankles."

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