Peter Hain has been reported to the Parliamentary Standards Commissioner for failing to declare £103,156 in gifts to his Labour deputy leader bid.
Mr Hain is facing a call for his resignation
The watchdog will investigate whether the work and pensions secretary broke the rules on MPs' conduct.
Downing Street said Gordon Brown had "full confidence" in Mr Hain, who has said his failure to declare the donations was an innocent mistake.
But Plaid Cymru has called for Mr Hain, who is also Welsh secretary, to resign.
The Conservatives have held back from calling for Mr Hain's resignation, pending the outcome of the investigation by standards commissioner John Lyon.
But Tory work and pensions spokesman Chris Grayling said: "If he gets severely criticised by the standards commissioner I think there will be very real doubts about his future."
Mr Lyon will now prepare a report for the Committee on Standards and Privileges, which can recommend Mr Hain be suspended from Parliament.
Prime Minister Gordon Brown is standing by Mr Hain, although the latest developments are likely to cause fresh embarrassment for Labour, which is already facing a police investigation over proxy donations made by businessman David Abrahams.
Peter Hain's campaign took out a full page ad in the Daily Mirror
They also cast fresh light on Labour's deputy leadership contest, after it emerged Harriet Harman's successful campaign accepted £5,000 from one of Mr Abrahams' proxies. She has said the money will be returned.
Tory MP David Davies, who lodged the complaint against Mr Hain, said: "What happens next is up to the Committee for Standards, and Gordon Brown, but there has to come a point where people say it's not feasible for him to be running two departments when all this has gone on."
The Electoral Commission has launched a separate investigation after Mr Hain admitted he failed to declare £103,156 in donations.
In a statement, Mr Hain said he had been too busy with his duties as the then Northern Ireland secretary to concentrate on the "day-to-day administration and organisation" of his deputy leadership bid, something he now "regrets".
He said the campaign to raise more cash, after the deputy leadership contest finished in June last year, was to clear "unpaid invoices".
But he learned on 29 November last year that these donations had not been declared within the required timescale, and "immediately" informed the commission.
More than £25,000 in donations to Mr Hain's campaign were channelled through the Progressive Policy Forum (PPF), a little-known think tank set up three months after he launched his campaign.
It has emerged that one of the PPF's trustees, John Underwood, a former Labour communications director, was closely involved in the financing of Mr Hain's campaign.
The think tank is registered at a solicitor's office in London but does not appear to be active.
There is nothing illegal about donating through proxies, provided the original source of the money is reported to the authorities.
Donors 'not consulted'
Mr Hain said all of the individuals who had given money to the PPF had done so in the full knowledge that it would be transferred to his campaign.
But the BBC has spoken to one donor, who did not want to be named, who said he had not been consulted.
The BBC understands another donor, diamond dealer Willie Nagel, who gave £5,000 to the PPF and made three-month loan for £25,000, was not told the cash had been subsequently given to Mr Hain's campaign.
But in a statement issued through his solicitor, Mr Nagel said he had had "no objection" to it being used to support Mr Hain's campaign, as he had known the Labour minister since 2000 and "respected" his activities.
Christopher Campbell, a former rail executive, gave £1,990 to the PPC, which was transferred to the campaign.
Another donor, Isaac Kaye, a former head of a company raided in 2002 by police investigating alleged price fixing of NHS drugs, gave nearly £15,000 through the PPF.
Steve Morgan, the lobbyist brought in to run the later stages of Mr Hain's campaign, gave £5,000 through the same method.
Elfyn Llwyd, Plaid Cymru's leader in Parliament, told BBC Wales that the latest revelations meant Mr Hain's position was no longer tenable. He accused him of "playing fast and loose with the law."
The Labour MP for Battersea, Martin Linton, who was part of Mr Hain's campaign team, defended what he described as an "honest, innocent oversight".
The latest revelations mean Mr Hain, who came fifth out of six in the deputy leadership contest won by Ms Harman, spent at least £191,300 on his campaign, rather than the £82,000 he had originally declared.
The campaign is thought to have spent heavily on courting trade union support and, on 8 June last year, took out a full page advertisement in the Daily Mirror, thought to have cost £25,000.