Tony Blair has said no-one in the Labour Party has sold honours in return for financial backing to his knowledge.
The PM told BBC One's The Politics Show there was nothing wrong with working peerages being given to party backers.
However, he said the perception that "cash-for-honours" allegations involved wrongdoing by Labour was a problem.
Mr Blair also appeared to rule out an early exit from Downing Street by saying he was "looking forward" to next year's G8 summit.
Former Labour deputy leader Lord Hattersley has called on Mr Blair to quit as prime minister in September.
"Nobody in the Labour Party to my knowledge has sold honours or sold peerages," Mr Blair said.
"The fact that is sometimes excluded from the public's mind in relation to this debate is that there are places in the House of Lords that are reserved for party nominees for their party supporters.
"These are not honours, they are working peerages reserved for party supporters, Conservative supporters, Labour supporters, Liberal Democrat supporters."
Mr Blair refused to speak directly about the arrest of his ally, Labour's chief fundraiser Lord Levy, in the ongoing police investigation into cash-for-honours allegations.
It is alleged that four Labour backers who lent money to the party before the last election were later nominated for peerages.
Mr Blair said: "Perception is a real problem and obviously one of the biggest worries in this is that whilst the police inquiry goes on, effectively everyone gets tried in the media, which is not always the most objective and impartial on these issues".
But he added: "Of course we have had people that have got themselves into difficulties and ministers being dismissed and we've had huge problems obviously on this front."
The prime minister said the rules over party funding might have to be changed, with the possibility that taxpayers could be asked to contribute.
Former prime minister John Major said the allegations facing the government were worse than those made against his party when he was in power.
He said: "The question of sleaze and mud was originally invented by the Labour Party, who threw it at the Conservative Party to damage us politically.
"What goes around comes around and they are now suffering from that themselves."
Shadow foreign secretary William Hague said: "I think the whole body politic should be embarrassed by the fact these police inquiries have taken place."
Mr Blair defended Mr Prescott over the deputy PM's contacts with American billionaire Philip Anschutz who wants to create a "super casino" at the Millennium Dome.
Mr Prescott had previously not declared that he stayed at Mr Anschutz's ranch during a trip to the US last year.
"Has anybody got any actual evidence that John has interfered in this process in an improper way?" said Mr Blair.
"I haven't seen any. I mean I've seen hoards of newspaper allegations about something to do with cowboy boots and some belt or something."
Mr Blair, who is currently at the G8 summit in St Petersburg, was asked if he would still be prime minister when the G8 summit comes round again next summer.
"I've made it clear all the way through, I'll carry on doing the job," he said.
"And so I look forward to next year's G8 of course, but in the end the most important thing is to do the job."