Tony Blair admitted yesterday that there was a direct link between donating large sums of money to the Labour Party and being nominated for a seat in the House of Lords.
He said Labour had done nothing wrong by awarding "working peerages", which he said were reserved for party supporters, to wealthy businessmen who had helped to finance the party's general election campaign and pay its bills.
The Prime Minister told BBC 1's The Politics Show that the perception that "cash-for-honours" allegations involved wrongdoing by Labour was a "real problem" but insisted his party had not broken the rules.
Mr Blair brushed aside a call from Lord Hattersley, a Labour elder statesman, for him to step down this autumn. He said he was carrying on as Prime Minister despite the "noises off" and was looking forward to the next G8 summit to be held in the summer of 2007.
During an interview recorded in St Petersburg, Mr Blair set out the basis of his likely defence if, as seems highly likely, he is questioned by Scotland Yard detectives investigating allegations that a 1925 law banning the sale of honours has been broken by political parties giving peerages in return for donations and loans.
Mr Blair has been accused of selling peerages after four businessmen gave Labour £4.5 million in unpublicised loans. They were: Barry Townsley, a stockbroker who has also donated money towards a city academy school; Sir David Garrard, a property developer who also donated money to a city academy; Dr Chai Patel, the chief executive of Priory Clinics; and Sir Gulam Noon, who said he was advised to keep a £250,000 loan secret.
The existence of the loans emerged after the Lords Appointments Commission, an independent watchdog which vets party nominations for new peers, raised concerns about some of the men nominated. The nominations were later blocked or withdrawn by those involved.
A defiant Mr Blair said the peerages were "not honours". They were nominations for working peerages in the House of Lords reserved for party nominees - Labour, Conservative and Liberal Democrat supporters.
"In my view, it is absurd to say that if someone supports a political party financially that they should be debarred from those places reserved specifically for party supporters," Mr Blair said.
But he sidestepped questions about why Labour had sought loans - which would be kept secret - and not straightforward donations that would have to be declared to the electoral watchdog.
"Well people can solicit loans or they can solicit gifts, and frankly there is no real difference between the two," he said. Mr Blair refused to be drawn on whether he was likely to become the first serving prime minister to be questioned by police investigating alleged corruption.
Nor would he comment on the arrest for questioning of Lord Levy, his chief fund-raiser and a close personal friend. But he said that one of his biggest worries was that people were being "tried" by the media as the police inquiry progressed.
Asked whether Labour had been "whiter than white", Mr Blair acknowledged that the Government had "huge problems" on that front, and he had dismissed ministers who got into difficulty.
But Labour had also introduced rules on party funding - "the only reason anyone knows anything about who gives to a political party today is because of the laws that we've introduced".
Lord Hattersley, a former Labour deputy leader, urged Mr Blair to quit in September, saying that the longer he stayed on beyond this year's Labour conference the more damaging it would be for the party. He said Gordon Brown, the Chancellor, would be the "ideal" successor.
Lord Hattersley told GMTV's Sunday Programme that the cash-for-honours allegations were "deeply damaging" to Labour.
• Labour "sleaze" is worse than under the last Tory administration because Mr Blair's Government itself is directly implicated, Sir John Major, the Conservative former prime minister, said on BBC 1's Sunday AM yesterday.
A YouGov poll for The Daily Telegraph on Saturday showed that Mr Blair's administration was now viewed by the public as "sleazier" than the last Tory government.
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