Iain Gray, Labour’s leader in the Scottish Parliament, was last night embroiled in a sleaze row after it emerged one of his campaign donors had improperly benefited from public funds.

East Lothian Council said it was investigating how about £6700 of public resources were directed to Prestonpans Labour Party to help it stage an annual fundraiser, despite council rules forbidding it.

The same Labour branch donated £800 to Mr Gray’s campaign to become the party’s Holyrood leader last year.

Labour said Mr Gray had accepted the donation “in good faith” and would co-operate with the inquiry, while his opponents urged him to give a full account of the affair.

Mr Gray’s predecessor, Wendy Alexander, was forced to resign after she accepted an illegal donation for her leadership campaign in 2007.

A council spokeswoman said Preston­pans Labour Party had received “support in kind” for its annual fundraising barbecue for at least a decade in the form of a loaned council marquee and council workers to erect and dismantle it.

The support was worth up to the equivalent of £700 a year in resources.

Accounts filed at the Electoral Commission show the barbecues raised around £500 each year, some of which went into Labour funds.

It is understood some barbecues were held at a council-run community centre in the town, and some at Prestonpans Labour Social Club.

Although East Lothian Council loaned the same marquee to many community groups, such as flower shows and galas, a spokeswoman said clear rules prohibited resources going to political parties.

The arrangement began when East Lothian Council was under Labour control. It is now run by the SNP and Liberal Democrats.

Tom Shearer, head of community wellbeing at the council, has written to Prestonpans Labour Party warning it will be expected to repay funds.

SNP councillor Paul McLennan, who discovered the arrangement while working on next year’s draft budget, said: “We want to find out who instructed this. It does not matter whether it was £200 or £7,000, it is the principle of the thing. The rules are clear that the local authority should not give any support to political parties. Officials are looking into this and we want the money back.”

David Costello, chairman of Preston­pans Labour Party, insisted there was no wrongdoing, because the party was part of the community.

“I am certain we have done nothing wrong and if the council wants to talk to me, the treasurer or secretary, we will be perfectly willing to discuss this issue.

“Iain (Gray) has nothing to do with the running of this and nothing to do with the organising.”

Prestonpans Labour Party is one of six branches within Mr Gray’s East Lothian seat. Although he is a member of the Haddington branch, the support of Prestonpans, with its large Labour social club and big membership, was pivotal in Mr Gray being selected for the seat in 2007.

He had been out of Holyrood since 2003, when he lost the Edinburgh Pentlands seat to the Tories.

In gratitude, Mr Gray used the Prestonpans Social Club to launch his Holyrood leadership campaign in July 2008, thanking members for their “tremendous” support.

Prestonpans Labour Party then gave £800 to the Gray campaign, which according to Mr Gray’s register of interests went via Pat O’Brien, former Labour provost of East Lothian.

The social club, which is a separate business, gave Mr Gray’s campaign a further £1500.

Cllr Willie Innes, chairman of East Lothian Constituency Labour Party, said the council had never told the Prestonpans branch it was exempt from using community resources.

But SNP MSP Christine Grahame said: “This is an astonishing use of public money. The Labour Party must reimburse the taxpayer for the subsidy it received from this event and Iain Gray must be honest as to whether he knew council resources were going toward Labour Party events.

“Council funds are there to support the people of East Lothian, not the Labour Party.”

The Tories called for an external audit rather the council’s in-house inquiry.

MSP Derek Brownlee said: “The value of these donations to Labour must be repaid immediately. This is an abuse of taxpayers’ money.”

The row is not the first Mr Gray has inherited from the East Lothian Labour Party. Last year, he was dragged into a civil war between local Labour MP Anne Moffat and Labour activists who wanted to deselect her. The in-fighting became so bad Labour officials suspended the constituency party for several months.

A Labour spokesman said the Preston­pans branch had openly used the council marquee for up to 20 years, running a fundrasing barbecue that was “a highlight in the community calendar”.

He said: “Iain Gray accepted the donation from the branch in good faith. The matter needs to be sorted out between the Prestonpans Labour Party branch and the local council.

“If any action needs to be taken on this donation it will be taken.

“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 and attack Labour about a community marquee.”

A council spokeswoman said: “We expect our investigation into this to be concluded early next year. The resources in question relate to the cost of erecting a marquee and other associated costs, such as stage furniture and flowers.

“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.”