Dec. 14 (Bloomberg) -- U.K. police questioned Prime Minister Tony Blair in connection with a criminal investigation into whether the ruling Labour Party sold seats in the House of Lords in exchange for loans and donations.

``It was expected that police would ask to see the prime minister as the investigation reached its conclusion,'' Tom Kelly, a spokesman for Blair, told journalists in London today.

The probe is the most serious to touch directly a British prime minister and may hasten Blair's retirement set for sometime next year. Blair took office in 1997 pledging to make politics ``whiter than white'' on ethical issues.

``The longer this goes on the more of it becomes part of the whole problem for Labour,'' said John Curtice, a professor of political science at the University of Strathclyde in Glasgow.

While David Lloyd George, prime minister from 1916-1922, was accused of selling honors in 1922, he was not questioned by police. His agent, Maundy Gregory, was the only man ever convicted of selling honors. He was jailed for six months.

Police began their probe in March after Labour disclosed that it received 14 million pounds ($26 million) in loans from 12 of its supporters, four of whom were later offered peerages allowing them to sit in the upper chamber of Parliament.

Parties in Debt

Britain's political parties had debts of 60.5 million pounds in November, according to the Electoral Commission. The main opposition Conservative Party owed the most, 35.3 million pounds. Labour borrowed 23.4 million pounds, mostly to the Co-Operative Bank Plc the union-controlled Unity Trust Bank.

Questions about how political parties raise money prompted Blair to ask a former senior civil servant, Hayden Phillips, to suggest ways to change the system. He reports next year. The Electoral Commission, which regulates political finance, also has demanded more details from each of the three main parties.

Labour also has pledged since before it entered office to change the way the House of Lords operates. That effort never attracted a consensus across political parties and remains stalled.

``This sorry episode underlines the vital importance of reforming both the House of Lords and rules relating to party funding,'' said Norman Lamb, a lawmaker for the Liberal Democrat Party and a member of Parliament.

Disclosure Rules

In 2000, the government passed laws forcing political parties to disclose donations. Until this year, there was no requirement to give details of loans.

Labour has resisted the Conservative's proposal to cap donations to political parties at 50,000 pounds from each organization. Labour has raised about 85.5 million pounds since records started in 2001. Two-thirds of that, 54.8 million pounds, come from trade unions, Electoral Commission records show.

Chancellor of the Exchequer Gordon Brown, preparing to take over when Blair steps down next year, was asked in November to provide evidence to the inquiry. Neither he nor Blair have been accused of wrongdoing.

Kelly said Blair wasn't interviewed under caution, which may indicate police are not planning to charge him. British police caution people suspected of crimes that their testimony can be used against them in court. Blair, himself a lawyer, was questioned with only a note-taker present.

``This doesn't mean Blair's in the clear,'' Curtice said. ``They could still come back and question him under caution but this is clearly the better of the two possible scenarios.''

Political Question

The Scottish National Party, which opposes Labour, asked police to investigate whether honors were sold in March. The SNP is battling Labour for seats in Scottish Parliament elections scheduled for next year.

Police have previously arrested three people in connection their probe. They are: Christopher Evans, founder of Merlin Biosciences; Michael Levy, Blair's chief fundraiser; and Des Smith, a London headmaster who tried to find people to put cash into failing schools. No charges have been filed.

Under U.K. law, loans to political parties must be made at commercial rates, or the party would have been obliged to report them as gifts and name the sources.

Most of the loans from individuals to Labour were unsecured, and at fixed rates of 6.5 percent to 6.75 percent. The police will have to decide whether this was a commercial rate.

Blair made no comment to reporters as he left his Downing Street residence this afternoon to attend the European Union leaders summit in Brussels today and tomorrow. Later, he will travel to the Middle East, aiming to spur peace talks.

To contact the reporter on this story: Robert Hutton in London at rhutton1@bloomberg.net. Mark Deen in Brussels at markdeen@bloomberg.net.

Last Updated: December 14, 2006 10:38 EST