The row over a property developer's donations to Labour has been referred to police by the Electoral Commission.
Labour's ex-general secretary Peter Watt and David Abrahams
The Lib Dems and Conservatives had already urged Scotland Yard to investigate after Gordon Brown said donations were not "lawfully declared".
More than £650,000 given to the party by David Abrahams is to be returned.
Work and Pensions Secretary Peter Hain has said he failed to register a £5,000 deputy leadership campaign donation, blaming an "administrative error".
In a statement, Mr Hain said: "In the light of recent events, it has come to my attention that a donation from Jon Mendelsohn to my deputy leadership campaign was mistakenly not registered with the Electoral Commission."
The minister said "immediate steps" would be taken to ensure that the donation, which was made before Mr Mendelsohn became the party's fundraiser, would be registered.
Meanwhile, where the donations row is concerned, the Labour leader's campaign manager has said "at no point" did Mr Brown know Mr Abrahams was a donor, or was passing on money via four other people.
Under the Political Parties, Elections and Referendum Act 2000, details of any donor making gifts through a third party must be registered and reported to the Electoral Commission.
Mr Brown said donations from Mr Abrahams over four years - under the names of associates Janet Kidd, Janet Dunn, John McCarthy and Ray Ruddick - were "completely unacceptable".
The Lib Dems had said there appeared to have been "serious breaches" of the law and wanted police to investigate "fully".
On Thursday, Metropolitan Police Commissioner Sir Ian Blair told the party's environment spokesman, Chris Huhne, in a letter that political donations were dealt with by the Electoral Commission in the first instance.
"The Electoral Commission has now decided to refer matters to the Metropolitan Police for further investigation. The next step is for us to receive and review their reference report," he said.
A spokesman for the Electoral Commission said the organisation had been "in dialogue" with the Crown Prosecution Service since Monday.
"The commission has now decided to refer the matter to the Metropolitan Police Service for further investigation," he added.
Mr Huhne said this was "the right decision, precisely because the police are the only people who can get to the bottom of this".
Tory leader David Cameron said he thought Mr Brown was "in a very bad place" as a result of the affair, which he called one of "a succession of disasters to hit the government".
As well as giving money to Labour, Mr Abrahams decided to support certain candidates campaigning to become the party's leader and deputy leader earlier this year.
Mr Brown's leadership campaign was sent a cheque for £5,000 by Mrs Kidd, money which it is now known was being offered on behalf of Mr Abrahams.
Mr Brown's campaign manager, Chris Leslie, said he "tore up the cheque" because Mrs Kidd's name was new to him and his colleagues. "It was not the practice of the campaign to accept donations from individuals who were not known to us."
He said he passed her details to the team overseeing Harriet Harman's successful bid to be Labour's deputy leader - and that campaign then accepted a £5,000 donation from Mrs Kidd.
The BBC understands Ms Harman's team were aware that Mr Brown had rejected Mrs Kidd's money but it is unclear if they questioned why the donation was turned down.
Ms Harman said she had no idea the money really came from Mr Abrahams, and had accepted it on the basis that Mrs Kidd was a known Labour donor. She said she acted in good faith, "within both the letter and the spirit of the law".
One of Ms Harman's rival contenders, Hilary Benn, turned down the same amount from Ms Kidd, because he had been told it was actually from David Abrahams. He later accepted it under Mr Abrahams' name.
Mr Abrahams has said he did not know he was breaking any rules when he made the donations, claiming that he kept them secret to avoid publicity.
He told the BBC: "I didn't know it was illegal for a person who hadn't personally donated to have to declare his hand to the Electoral Commission, otherwise I most certainly wouldn't have contributed in this way."
Mr Brown has launched an internal inquiry which will advise on what changes are needed.
The Metropolitan Police has just wrapped up the 19-month, £1.4m "cash-for-honours" investigation into party funding.
That inquiry, which cast a shadow over Tony Blair's final months as prime minister, ended with no charges being brought.
Labour's general secretary Peter Watt has already resigned over the latest row - saying he knew about Mr Abrahams' funding arrangement, but did not think it broke the rules.
Labour's chief fundraiser Jon Mendelsohn has said Mr Watt told him about it last month but he had been unhappy about it and had contacted Mr Abrahams with the intention of putting his donations on a proper footing.