Plaid Cymru have said Welsh Secretary Peter Hain offered the late MP and assembly member Peter Law a peerage.
Mr Hain said it was a 'false accusation'
Mr Law was offered a peerage not to stand against Labour in Blaenau Gwent at the last general election, Plaid's Commons leader Elfyn Llwyd claimed.
He made the allegation in the Commons on the day of Mr Law's funeral and while Mr Hain was at a family funeral.
Mr Hain categorically denied the allegation, accused Mr Llwyd of "cowardice" and demanded an apology.
Mr Llwyd's allegation was made during Commons business questions. He said Mr Hain was acting on the authority of the prime minister.
Commons Leader Geoff Hoon criticised Mr Llwyd for making the claim when Mr Hain was not in the chamber to answer it.
'No such offer'
Mr Hain said afterwards: "I regard it as an act of cowardice that when Elfyn Llwyd had the opportunity to put this lie to me directly in the House of Commons yesterday he instead raised it when I was absent at a family funeral and unable to rebut this false accusation."
Peter Law overturned the largest Labour majority in Wales
In a statement, he added: "I am at a loss to understand why it is now being alleged that Peter Law would have made such an accusation about me, when he himself never made that allegation public, even when he was standing in the general election.
"The suggestion that I offered a peerage to Peter Law is utterly without substance. And indeed the Labour Party have made it absolutely clear that no such offer was made."
Mr Llwyd told MPs: "New Labour, in an effort to prevent him from standing for Parliament, offered him a peerage.
"The man named as being responsible is the secretary of state for Wales who made the offer on the specific authority of the prime minister."
Mr Llwyd demanded a debate on the "corrupt practice".
The Tories called for an investigation into the claims.
Shadow Welsh secretary Cheryl Gillan said: "I have written to the Prime Minster asking for a full and independent investigation into this allegation."
Mr Hain later wrote to the Speaker of the Commons, demanding an apology from the MP, saying he found it hard to express "just how angry" he was with Mr Llwyd.
He said he was "astonished" Mr Llwyd had claimed he gave him prior notice of his plan to raise the matter, saying he had not.
"I find it appalling that Mr Llwyd has behaved in this manner and believe that he should make a full apology to you, to me and to the House," he wrote.
Mr Law, 58, died last week after suffering from a brain tumour.
He caused a political storm at the general election in May 2005, overturning a 19,000 Labour majority to be elected as an independent.
Later, Mr Llwyd acknowledged he should have made more effort to warn Mr Hain about his peerage allegations.
In a letter to the Speaker, Mr Llwyd wrote: "On reflection fuller and greater notice should have been given."