A Conservative Party donor lobbied the government to cancel the £80m loan to Sheffield Forgemasters, Labour MP Clive Betts has claimed.
During an adjournment debate on 21 July 2010, MPs heard that Andrew Cook, chairman of engineering firm William Cook Holdings wrote to Conservative Business Minister Mark Prisk calling for the funding to be withdrawn.
The loan to build nuclear power station components was agreed under Labour, but cancelled as part of the coalition's efforts to rebalance the nation's finances.
Angela Smith, the MP for Penistone and Stocksbridge, produced the letter from Mr Cook which she had obtained following a Freedom of Information (FoI) Act application.
She said: "This approach, from a major donor of the Tory party, seems to provide the only basis for the government's decision to cancel the loan."
Her colleague Clive Betts, the MP for Sheffield South East, had secured the adjournment debate and read extracts of the document to the chamber.
Mr Betts said that the letter described the loan as "unnecessary", "possibly illegal under EU rules" and being a "typical Labour sacred cow".
He also claimed that Mr Cook had told the minister that "the private sector can provide the required finance without the taxpayer shelling out".
The Labour MP said it was "difficult to believe" that the letter was not taken into account in the government's decision to cancel the loan.
He called on the government to hold "a proper and independent review into this whole matter".
Responding to the debate, Mr Prisk said the letter was "noted" but had "no bearing on the decision-making process".
He added: "This has always been, as my colleagues and I have made clear, an issue of affordability."