Tony Blair’s chief fundraiser Lord Levy has been arrested.
His arrest is in connection with the "cash-for-honours" inquiry by the Metropolitan Police.
Lord Levy, 61, made his money in the music industry in the 1960s and 1970s, managing singers including Alvin Stardust and Chris Rea.
He has been a high profile fundraiser for Labour since Tony Blair’s election. Lord Levy is understood to be being held at a North London police station.
Asked if he had any reaction to the news that Lord Levy had been arrested, the prime minister’s official spokesman said: "I cannot comment on that, it is a party matter."
He confirmed the peer was still the prime minister’s Middle East envoy.
A Scotland Yard spokesman would not confirm whether Lord Levy had been arrested, but did say a man had been arrested by the Specialist Crime Directorate of the Metropolitan Police in connection with inquiries into possible breaches of honours and election laws.
The spokesman said the man had been asked to attend a London police station on Wednesday morning and questioned about possible infringements of the Honours (Prevention of Abuses ) Act 1925 and the Political Parties Elections and Referendums Act.
Scotland Yard is conducting a wide-ranging investigation into loans and donations made to all three parties to see if there is any evidence that honours have been given as rewards for financial help.
It was prompted by the revelation earlier this year that a number of multi-million pound loans were secretly given to Labour before the last election, and that some of the lenders had subsequently been nominated by Tony Blair for peerages.
All involved have denied any wrong-doing.
BBC Political Editor Nick Robinson said the arrest was "deeply damaging for Tony Blair" because Lord Levy is a particular friend of the prime minister.
He said the fate of Lord Levy and Mr Blair was "intertwined". "It doesn’t get much more serious than this," he said.
Angus MacNeil, the Scottish Nationalist Party MP who initiated the police inquiry, called for a freeze on all future honours until the investigation is completed.
"This is a significant development and one that would appear to justify my decision to report this matter to the police," he said.
Definitely what you call a brown-trousers moment for out Imperious Leader – could this be where it all starts to unravel, or will Levy take the fall alone?