Former MP Martin Bell has called on Tony Blair to suspend all appointments to the House of Lords until the "cash for honours" row is resolved.
Bell said public confidence was crumbling
His joint letter with Scottish National Party MP Angus MacNeil said this could restore public confidence in politics.
Mr Bell was elected as an Independent in 1997, on an "anti-sleaze" ticket.
Earlier this week a former government aide was held by police investigating allegations that Labour Party backers might have been promised honours.
Des Smith had quit after he appeared to suggest that donors to Mr Blair's flagship city academies would be rewarded with honours or peerages.
That led a wealthy sponsor of three state schools in England, Sir Peter Vardy, to say it would be a shame if the honours row deterred other backers.
In the joint letter, Mr Bell and Mr MacNeil said: "You will realise by now the seriousness of the cash for honours scandal with the first arrest now having been made.
"We suggest that you no longer attempt to dismiss this lightly as you have seemed to do in the past."
Mr Bell said his election in 1997 was because of Conservative corruption, but Labour's current troubles were much worse.
"It is time to stop the rot and one way to start is to freeze all appointments to the Lords until such time that this matter is resolved," he said.
"I doubt if even now the prime minister and indeed the Conservative Party recognise the extent to which they have brought politics into disrepute and it is high time that they did."
Mr MacNeil, whose complaint to Scotland Yard sparked the present police investigation, added: "There is a total collapse of confidence in the integrity of his government and a widespread belief that honours are bartered around like second hand cars.
"Tony Blair is now the Arthur Daly of Westminster politics."
Alex Salmond, the leader of the Scottish National Party, told BBC News it had been an open secret at Westminster that honours were bought and sold, and a suspension of appointments to the House of Lords was now required.