The Metropolitan Police are expected to begin examining evidence about secret donations to the Labour Party.
Peter Watt and David Abrahams at a dinner earlier this year
The Electoral Commission asked them to investigate after it emerged Labour received more than £650,000 from David Abrahams via middlemen.
Gordon Brown said the donations will be returned as they were unlawful.
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 [party fundraiser] 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, police are set to begin the second inquiry into the Labour party's finances in two years.
The development comes as a new poll puts Labour further behind the Conservatives than at any time since 1988.
The Metropolitan police will attempt to determine who knew about the money being channelled to the party through proxy donors, and who broke the law.
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" before the matter was passed on to the Electoral Commission, which has now referred the evidence to the police.
Lib Dem environment spokesman Chris 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.
But Harriet Harman accepted a £5,000 donation from the same source during the deputy leadership race she eventually won.
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".
It has now emerged that former Labour MP Chris Leslie, who acted as Mr Brown's leadership campaign co-ordinator, put them in touch with Mrs Kidd.
According to BBC2's Newsnight, Ms Harman's team needed the money to pay off debts run up during her campaign.
In a statement, Mr Leslie said that in May he had been contacted by "a man calling himself David Abrahams" who had referred him to Mrs Kidd as someone who wanted to make a donation to Mr Brown's campaign.
Mr Leslie said he did not know Mr Abrahams or Mrs Kidd. He nevertheless contacted Mrs Kidd who "unprompted" sent the campaign a cheque for £5,000.
When he discovered that no-one in the campaign team knew who she was, Mr Leslie said he tore up the cheque.
After the campaign was over, he was approached by a member of Ms Harman's team who asked if he knew of anyone who might be prepared to make a donation to her deputy leadership campaign fund.
"I passed them the details of Mrs Kidd as someone whose offer of a donation we had not taken up," he said.
He stressed that neither Mr Brown nor Justice Secretary Jack Straw, who was Mr Brown's campaign manager, had known anything about the contacts with Mr Abrahams or Mrs Kidd's donation.
One of Ms Harman's rival contenders, Hilary Benn, turned down the same amount from Mrs Kidd, because he had been told it was actually from David Abrahams. He later accepted it under Mr Abrahams' name.
'Cash for honours'
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.
The Metropolitan Police has just completed 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.
Earlier this year, Mr Watt was pictured with Mr Abrahams when the party official was the guest of the donor at a dinner to celebrate the 75th anniversary of the Jewish Museum in London.