THE UK Government is set to launch a top-level inquiry into the Co-operative Bank and its disgraced former chairman Paul Flowers as the controversy surrounding the institution descended into a major tit-for-tat row between the Tories and Labour at Westminster.

At a rowdy Prime Minister's Questions, David Cameron accused the Labour leadership of being "mired in a banking scandal" while, later, Ed Miliband accused the Coalition of engaging in a "desperate political distraction" by seeking to set up a new inquiry.

The clash came after West ­Yorkshire Police searched the home of Mr Flowers, who led the troubled bank for three years until this June, in relation to ­allegations that he bought and used illegal drugs, including crystal meth, crack cocaine and ketamine.

Mr Flowers, a Methodist minister, is a former Labour councillor but has been suspended from his church and the party. He apologised after he was filmed allegedly buying drugs.

The 63-year-old is said to have approved millions of pounds in donations to the Labour and Co-operative parties, including a £50,000 donation to Shadow Chancellor Ed Balls.

No 10 made clear Chancellor George Osborne was in talks with industry regulators over the precise form of the Government-commissioned inquiry.

Mr Osborne is considering using new powers created by last year's Financial Services Act, enabling him to order a wide-ranging independent investigation to look into all of the Co-op's difficulties.

However, this would have to await the conclusion of any police investigation or enforcement action by the financial regulators.

No details have been released about the scope of any inquiry or who might chair it, but a senior Downing Street source made clear a decision could be expected "relatively soon".

The deepening controversy over the Co-operative Bank, which has emerged after the ailing institution had to be bailed out by hedge funds because of its financial difficulties, has seen Len Wardle, its Group chairman, quit.

On the political front, Grant Shapps, the Conservatives' chairman, has sought to up the pressure, asking when Mr Miliband and Mr Balls became aware Mr Flowers had resigned as a Labour councillor in Bradford after adult material was found on his computer.

During PMQs, Mr Cameron stressed the first priority was to safeguard the bank and ensure its customers and bondholders were protected without using taxpayers' money. But he then launched into a political attack against Mr Miliband and his colleagues.

He told MPs: "What we can now see is that this bank, driven into the wall by this chairman, has been giving soft loans to the Labour Party, facilities to the Labour Party, donations to the Labour Party, trooped in and out of Downing Street under Labour,(is) still advising the leader of the Labour Party.

"And yet, now we know, all along they knew about his past. Why did they do nothing to bring to the attention of the authorities this man who has broken a bank?"

The Labour leader sought to avert the attack - dismissed by his spokesman as "a rather desperate political distraction" - by reminding the PM that his own party had taken donations from individuals such as Asil Nadir, who was jailed after going on the run when facing fraud allegations.

The Labour spokesman stressed how the Government had "questions to answer" about ministers' meetings with the Co-op at a time when it was being encouraged to take over Lloyds branches.

Asked whether the Opposition would back an inquiry, he replied: "It depends what the inquiry is into."

Meanwhile, the Methodist Church, which had already suspended Mr Flowers for a three-week period under its rules, said the suspension was now indefinite and that its disciplinary procedure would be put on hold until after any police investigation.