One of Tony Blair's key political aides, Ruth Turner, has been arrested by police investigating the cash-for-honours row.
The prime minister's director of government relations was released without charge. However, today's early morning arrest - the fourth in the investigation - will be a serious embarrassment for Downing Street.
Mr Blair has backed Ms Turner, saying: "She is a person of the highest integrity for whom I have great regard and I continue to have complete confidence in her."
And she herself issued a comment through Downing Street this afternoon, saying: "I absolutely refute any allegations of wrongdoing of any nature whatsoever."
A spokesman for the Metropolitan police confirmed a woman was arrested at her London home in connection with alleged offences under the Honours (Prevention of Abuses) Act 1925 and on suspicion of perverting the course of justice.
Liberal Democrat MP Ed Davey, chief of staff to leader Menzies Campbell, said the news showed the need for reform of party funding, adding: "As this sorry saga continues, it is clear that the Blair government is now in its dog days, increasingly mired in sleaze."
The news comes as the constitutional affairs committee announced it would be investigating the attorney general's role in the honours probe, following his refusal to stand aside from the case.
Concerns have been raised that Lord Goldsmith's close relationship with Tony Blair - who is one of more than 90 people to be questioned in the inquiry - is in conflict with his duty to advise the Crown Prosecution Service (CPS) on whether to press charges.
And today, committee chairman Alan Beith highlighted discrepancies between Lord Goldsmith's refusal to distance himself and assurances by the lord chancellor, Lord Falconer, that the attorney general would "not interfere".
"The fact that the lord chancellor and attorney general could, in good faith, give us two rather different accounts of the attorney general's role underlines the case for examining the role of the attorney general, and we have now launched an inquiry to that effect," he said.
Police are investigating allegations that political parties offered wealthy backers seats in the House of Lords in return for secret loans. All those involved deny the claims.
As the government's top lawyer, Lord Goldsmith has an advisory role in the CPS decision to prosecute, but questions have been asked about a possible conflict of interest.
During its inquiry into party funding, the committee was told by Lord Falconer that decisions on pressing charges in the cash-for-honours case would be taken by the CPS and the director of public prosecutions (DPP), Ken MacDonald, in the "normal way".
He added: "Of course, the attorney general would not interfere in the normal course of decisions being made."
However, Lord Goldsmith announced last November that he could not stand aside, noting his consent was required before prosecutions on certain cases - including corruption - could proceed. He promised to consult an independent QC where necessary.
MPs on the committee asked both men to clarify their positions, and today released the previously unseen letters they received in response.
Lord Falconer wrote: "As I have since stated publicly, my statement before your committee that the case would be dealt with in the normal way without interference from the attorney general is consistent with the process set out by the attorney general in his recent statements."
But the attorney general said Lord Falconer "was not in a position to give an 'assurance' as you have termed it, as to how I would act", adding: "No other minister, however distinguished or senior, has the ability to bind the attorney general in how he exercises his role."