updated 7/12/2006 7:58:02 PM ET 2006-07-12T23:58:02

Tony Blair's top fund-raiser, Lord Levy, was arrested Wednesday in an investigation into whether Labor Party leaders improperly nominated their financial backers for seats in the House of Lords, Levy's spokesman said.

The arrest could mean major political trouble for Blair, who counts Levy as a key political ally. The prime minister's approval ratings took a big hit when the so-called "cash-for-honors" scandal first broke in March, and Levy's arrest brings it dangerously close to home.

Blair's relationship with Levy is "very close, personally and professionally," said Anthony Seldon, a biographer of the prime minister. "They play tennis together, they enjoy relaxing together."

Levy "is very important (to Blair), he has been hugely important at raising the money and I think he's also been an important ally and friend," he said.

Levy — whom Blair nominated to the House of Lords — vehemently denied any wrongdoing. He was released on bail.

The arrest came as part of a criminal investigation into whether Blair and other party leaders sold seats in the House of Lords and honors like knighthoods to financial supporters.

Blair acknowledged earlier this year that Labor had accepted secret loans from supporters, some of whom he later nominated for seats in the House of Lords. But he denied trying to sell the seats and other honors and said that all his Lords nominees are well-qualified.

British campaign finance law requires that gifts to political parties be publicly declared, but it does not cover loans. Labor has acknowledged it did not disclose loans of almost $25 million from 12 supporters.

Levy's spokesman, Nick Lloyd, accused police of using their arrest powers unnecessarily, "apparently in order to gain access to documents that Lord Levy would quite willingly have provided without this device."

Police said they had arrested a man in the case but would not identify him. They said the suspect had not been charged and their inquiries would continue.

Blair's official spokesman declined to comment, saying it was an issue for the party, not the government. Levy remains Blair's envoy on Middle Eastern issues, the spokesman said. A Labor spokesman said only that the party was cooperating with police.

Copyright 2006 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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