Prestonpans Labour Party, which donated £800 to Mr Gray’s campaign, was revealed yesterday as having wrongly received taxpayers’ assistance for more than a decade for its fundraising efforts, through the local authority giving it free use of a marquee for its annual barbecue, effectively a donation in kind worth some £700 a year.

East Lothian Council has confirmed that an investigation could result in funding in kind dating back five years being clawed back.

The SNP and Conservatives have said Mr Gray must repay the donation and that there must be an independent investigation into how the council came to give annual assistance of this kind to a party political fundraiser, in breach of rules.

But a Labour spokesman described the attack by political opponents as “ludicrous”, dismissing any comparison with the leadership campaign donations row which brought down his predecessor Wendy Alexander, and said the timing of the story looked like political manoeuvring to bury bad news.

“It must be pointed out that at the end of a week where Scottish education is in

crisis, the education secretary has been sacked and the First Minister is being investigated for misleading Parliament it is a sad spectacle watching the SNP try to attack Labour about a community marquee,” he said.

Christine Grahame, SNP MSP for the South of Scotland, said: “Labour lost their previous leader, Wendy Alexander, for accepting dodgy donations, now her successor at Holyrood is embroiled in another donations scandal.

“This is a significant sum of money which should have been used to benefit the East Lothian community by funding local fetes and gala days – not line Labour party coffers.

“We need an independent audit immediately to establish exactly how much Labour has profited from public money in East Lothian. They must refund local people without delay. Iain Gray must make it clear exactly what he knew about these events and when.”

Derek Brownlee, Tory MSP for South of Scotland said: “The value of these donations to Labour must be repaid immediately.

“This is an abuse of taxpayers’ money which should be used to fund vital local services. Given that East Lothian Council happily supported the Labour Party with this partisan backing, few people will trust any internal probe.

“That is why there must be an independent, external audit to confirm the extent of the abuse of council resources and whether there are any other examples.”

Labour said the council had yet to raise any concerns with the Prestonpans branch and added that although the free marquee hire started under a Labour administration it had continued for the two years since the council became SNP-LibDem controlled.

“The use of the marquee is a service that has been provided to local groups for many years due to a longstanding agreement East Lothian Council has with Prestonpans community council,” the spokesman said.

“The local party is more than happy to discuss the matter with council officials. At no point has any official indicated to Prestonpans Labour Party that there was a problem. The matter needs to be sorted out between Prestonpans Labour Party branch and the local council.”

A spokeswoman for the council said: “We expect our investigation into this to be concluded early next year.

“It appears this application was just put through every year by habit and that will form part of the inquiry. We understand from our legal team that only disputed funds from the past five years can be claimed back.”

Why Labour’s Leader isn’t quite in the clear

Will this become known as the Barbiegate scandal?

Unlikely. It is essentially a local row in East Lothian where for years it was taken for granted that it was OK for the council to assist a community barbecue, even although this was wrong because it was also a party political fundraiser.

But do comparisons with Wendy Alexander’s downfall mean Iain Gray is in trouble?

No. In Ms Alexander’s case both the legality of a donation and the way donations were registered broke the rules. Neither applies in this case, although if the Prestonpans party cash is proven to have been tainted it may be good politics for Mr Gray to hand the £800 back.

Should he have known the money might be tainted?

He was the local MSP but he was a member of a different branch, Haddington. Besides, Prestonpans Labour Club, a separate entity which is a thriving social club, also donated to his campaign so he will have thought the party coffers in the area were healthy.

So, he’s completely in the clear?

Not quite. Mud sticks – and it will be cast up in future – but more because of what it says about the culture of old Labour areas where it was simply assumed that the party, the council and the community were one and the same.