Harriet Harman says she will return a £5,000 donation which turned out to have come from a property developer under someone else's name.
Janet Kidd gave her the money during the deputy leadership race but it has emerged it came from David Abrahams.
Ms Harman said she was unaware of the link between the two and had accepted the donation in "good faith".
Her Tory shadow Theresa May has asked her to explain why she accepted the money after the deputy campaign ended.
Ms Harman said she had received the donation on 4 July, had written to Mrs Kidd personally to thank her and had no reason to think the money came from Mr Abrahams, who she said she had never heard of.
'Spirit of law'
She registered the donation with the Electoral Commission, as coming from Mrs Kidd, as well as the appropriate government departments and registers of interests.
Ms Harman told the BBC her campaign team had strict rules on who to accept donations from, they had to be on the electoral register and they had to be known to members of the team, or already be an accepted Labour donor.
"My campaign team understood her to be a pre-existing donor to the Labour Party," she said.
"I don't think there's any question of me having broken either the letter or the spirit of the law."
But Mrs May has said she still has "questions to answer" and has written to Ms Harman, demanding she make a statement to the House of Commons.
In the letter, Mrs May asked: "Why did you accept a donation for your deputy leadership campaign on 4 July - almost two weeks after your campaign ended?"
The only other deputy leadership contender known to have been offered money by Janet Kidd was Hilary Benn.
He turned it down after Baroness Jay, who was working on the campaign, told them it was on behalf of Mr Abrahams.
Mr Benn's team then said they would only accept the donation if it was under Mr Abrahams' own name, which is what happened.
At his regular media briefing Prime Minister Gordon Brown revealed that his campaign team had turned down a donation from Janet Kidd "as she was not known to them".
Asked if he gave his full backing to Ms Harman, the PM initially did not do so directly, instead referring the questioner to her statement that she had accepted the donation in good faith.
However after repeated questions on the subject he did say he had confidence in Ms Harman.