During a series of bitter exchanges at prime minister's questions, Mr Hague demanded to know why no action was being taken against a member of the Downing Street Policy Unit, following allegations in the Observer newspaper.

Jon Sopel reviews Tony Blair's most difficult 10 minutes in the Commons yet

The prime minister said Mr Hague was using "smear tactics" and "windy rhetoric"and again denied the claims in the cash-for-contacts row.

Meanwhile, one of the individuals at the centre of the row, Derek Draper, has resigned from his lobbyist job at GPC Market Access.

He had already been suspended from the firm and been sacked from another job as columnist on the Daily Express newspaper.

Derek Draper has left his job as lobbyist

The row began when the The Observer claimed that the political lobbyist, Mr Draper, arranged access into 10 Downing Street for clients with the help of the Downing Street policy adviser Roger Liddle.

Mr Draper denies the claim and is considering legal action against the newspaper.

The Downing Street policy adviser, Mr Liddle, has been strenuously backed by government ministers who argue the Observer has failed to provide any evidence to back up its story.

Sir Ian Wrigglesworth, head of GPC Market Access, said: "Following discussions, Derek Draper has this afternoon told GPC he has resigned in the best interests of GPC, its clients and staff, and to pursue other interests.

"The board of GPC welcomes Mr Draper's decision."

Mr Blair said at a stormy Question Time that he had instructed the Cabinet Secretary Sir Richard Wilson to revise the rules governing contacts between government employees and outside groups and "to strengthen them in any way he sees fit".

Mr Blair said: "There can be no circumstances that ever justify either passing confidential or inside information to a lobbyist or the granting of any improper preferential access or influence over government."

Blair denies wrongdoing

Responding to a call from Mr Hague to take action against his ministers, Mr Blair again denied any wrongdoing.

He said: "First of all, there was the supposed leak of the select committee report. We investigated that. No government minister was involved. No MP was involved.

"A member of a lobbying firm simply took a press embargoed copy. That shouldn't have happened but it is obviously not the fault of government.

Tony Blair faced a grilling from Conservative leader William Hague

"Second, was the allegation that there was the leak of the Chancellor's Mansion House speech and selective information in that speech was leaked.

"There was no such leak of that speech and the information concerned wasn't even in that speech."

Moving on the allegations about Mr Liddle, Mr Blair said: "That was based, as you know, on this talk at a cocktail party at the Guildhall.

"A freelance journalist, claiming to be an American businessman, said he wanted to invest in Britain and asked Mr Liddle to help, who agreed, perfectly properly.

"It is emphatically denied that he in any way offered, in doing so, to act on behalf of a lobbying company.

"The journalist claimed to have words suggesting this on tape. It is now admitted that this claim is false and no such tape exists."

Minister walks out

Meanwhile Hilary Armstrong, the Local Government Minister, walked out of a meeting with journalists as the contacts row reached a local government conference in Bournemouth.

BBC correspondent Nick Jones says he was given short shrift when he asked about Mr Lucas

Mrs Armstrong left a news conference when BBC correspondent Nick Jones asked her about the Local Government Association employing lobbyist Ben Lucas.

Mr Jones suggested that Mr Lucas had told the association that he would be able to get hold a copy of the forthcoming White Paper on local government before publication.

Ms Armstrong described that as an "outrage".

She said: "No one other than you from the BBC has suggested that anyone from the government has been involved in deals.

"It is a slur, it is outrageous. It is not true. I do deals with no one and I have been straight with delegates here."

It later emerged that the LGA were to meet to discuss the future of Mr Lucas, a director of lobbyist company LLM, who they are employing on a six-month contract.