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The government has been forced to agree to a new law banning people who do not pay UK income tax - or are not liable to do so - from giving money to political parties.

Threatened with a huge rebellion - and possible defeat - in the Commons on Monday, the Justice Secretary Jack Straw has made a dramatic U-turn and withdrawn government opposition to an amendment to the Elections Bill recently passed in the Lords by an alliance of Labour rebels, Liberal Democrats and cross-benchers.

The leader of the Lords rebellion Lord Campbell-Savours has confirmed to me that ministers have now accepted his plan, and this has also been confirmed to me by a senior government source.

The measure is clearly aimed at the Conservative Deputy Chairman and election strategist Lord Ashcroft who has given the Conservative Party millions of pounds in recent years, but who has aroused considerable controversy over whether he pays British tax.

But it is likely to have a significant effect on donations to both the major parties.

Both Labour and the Conservatives are thought to have taken large sums of money from wealthy supporters who are non-domiciled in the UK for tax purposes.

Mr Straw has held a series of meeting with Lords and Commons rebels this week but has finally conceded on the issue in the last 36 hours.

Ministers claimed they were sympathetic to the measure but told rebels there were various legal and technical reasons, and issues of principle as to why it was unworkable.

Some rebels suspected however, that Labour may have been hoping for big donations in the immediate future from supporters who do not pay UK tax.

Ministry of Justice officials will be working frantically over this weekend to overcome these obstacles.