One of the most senior women in David Cameron's cabinet faced calls to stand down last night amid allegations she claimed accommodation expenses while staying rent free with a friend.
Cabinet Office Minister Baroness Warsi insisted that she made an "appropriate payment".
But last night Labour MPs and a former sleaze watchdog called for a full investigation into her expenses claims.
Sir Alistair Graham, a former chairman of the Committee on Standards in Public Life, also said that Lady Warsi should stand down from her ministerial duties until an inquiry could be carried out.
The Conservative Party co-chairman and minister without portfolio is the most senior Muslim politician in Britain and attends cabinet.
But she has struggled in the past to win over backbenchers within her party.
Last night Tory deputy chairman Michael Fallon said the peer "believes" she acted within the rules, but admitted the controversy was embarrassing for the Conservatives.
David Cameron took a hard line on expenses when a major scandal erupted in 2009, realising sooner than many the potential damage it could cause.
The allegations centre on a flat in Acton, west London, where the peer stayed after joining the House of Lords in 2007.
She was staying there as a guest of Naweed Khan, who was at the time a member of Conservative Campaign headquarters staff.
Lady Warsi said that for the nights she stayed there she gave him the equivalent of what she had been paying to stay in a hotel.
But the owner of the house, Dr Wafik Moustafa, a GP, said that he had not received any money.
He said that for a time the property had been Lady Warsi's "place in London".
Asked whether she had ever paid rent, he said: "Rent has never been discussed and I've never received money or asked for money from Baroness Warsi."
In a statement Mr Khan said that in early 2008 Baroness Warsi had stayed with him for a short period.
"I confirm she made a financial payment on each occasion, which compensated for the inconvenience caused and additional costs incurred by me as a result of her being there," he added.
In a further embarrass- ment for Lady Warsi, she was forced to admit failing to declare rental income on a London flat in the Lords register of interests.
She said the omission was due to an "oversight", adding that she had reported the letting of her Wembley flat in the Register of Ministers' Interests.
The arrangement had also been declared to the Cabinet Office and HM Revenue and Customs, she said.
Peers are required to declare sources of income of more than £500, although the annual rent on a London flat is likely to be many times greater than that.
Mr Fallon acknowledged the controversy was "embarrassing" but said Lady Warsi believed she acted within the "spirit and letter" of the rules.
"These sorts of thing are always embarrassing but the key thing here is that Warsi has admitted she's made a mistake, she's apologised for it," he said.
"She's corrected the record now and she's very happy to co-operate with any investigation into her claims and I think it should be left at that until any investigation is reported."
Labour MP John Mann said he would be writing to the Lords standards commissioner requesting an investigation. "If you are paying no rent where you are staying, you can't possibly be claiming subsistence for staying there," he said.
Shadow cabinet minister Chuka Umunna backed calls for an inquiry. He said: "To rebuild trust and demonstrate this is being dealt with in a proper way there has to be a proper, independent investigation.
"So long as these stories endure, we are going to struggle to rebuild the trust and confidence we need there to be between Westminster and the people it exists to serve. That is incredibly important."
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