Speaking in the House of Commons on the day of Mr Law's funeral, Plaid's Elfyn LLwyd said: "New Labour, in an effort to prevent him from standing for Parliament, offered him a peerage.

"The man named as being responsible is the Secretary of State for Wales who made the offer on the specific authority of the Prime Minister." Mr Llwyd demanded a debate on the "corrupt practice".

Commons leader Geoff Hoon criticised Mr Llwyd for making the allegations when Mr Hain was not in the Commons to defend himself.

In a statement today Mr Hain said: "I regard it as an act of cowardice that when Elfyn Llwyd had the opportunity to put this lie to me directly in the House of Commons yesterday, he instead raised it when I was absent at a family funeral and unable to rebut this false accusation.

"I am at a loss to understand why it is now being alleged that Peter Law would have made such an accusation about me, when he himself never made that allegation public, even when he was standing in the general election.

"The suggestion that I offered a peerage to Peter Law is utterly without substance. And indeed the Labour Party have made it absolutely clear that no such offer was made."

And in a letter to the Speaker of the House of Commons, Mr Hain wrote this afternoon:

"I find it hard to express just how angry I am that Elfyn Llwyd today alleged in the House that I offered Peter Law a peerage.

"This false accusation has been in the media for a few days now and I have made absolutely clear that the allegation is completely untrue. I was on the front-bench in the Chamber yesterday for around 2 hours, including Welsh Questions and Points of Order, and Mr Llwyd could have made his allegation at a time when I was present to address it. He chose not to, preferring instead to spread this lie in my absence, while I was attending a family funeral.

"I was further astonished to be told that Mr Llwyd - in response to a direct question from you - told the House that he had given me prior notification of his intention to raise this today. He did not. His office contacted mine this morning to say that he wished to speak to me but were told that I was unavailable. My Principal Private Secretary offered to take the call instead but Mr Llwyd's office said he wished to speak to me. My office were given no indication of what the call was about and Mr Llwyd did not call me direct.

"I find it appalling that Mr Llwyd has behaved in this manner and believe that he should make a full apology to you, to me and to the House. I am copying this letter to the Leader of the House of Commons."

Mr Law, who was 58 when he died last Tuesday from a brain tumour, left the Labour Party in protest over its policy of imposing all-women candidates' shortlists. Standing as an independent, he went on to win the seat with a 9,000 majority at the 2005 election.

Mr Law was expelled from Labour after his decision to stand for the seat as an Independent.

His widow, Mrs Trish Law, told BBC Wales' Dragon's Eye programme: "There was pressure put on him. He had quite a number of phone calls from high-ranking politicians not to do it, [they said] he would be silly to do it, there was no way that he would win."

She said her husband told her that he might get a peerage if he did not fight the election as an independent.

Mrs Law said she believed a peerage was a serious proposition, otherwise, she said, "Peter would not have said it to me".

She said: "That's quite a lot of pressure and it was pressure at the time when he was, when he was quite ill as well you know, but Peter couldn't be bought."

Peter Law overturned the largest Labour majority in Wales

When asked, Mrs Law would not name who had offered her husband a peerage.

Meanwhile today, Mr Law's funeral took place in Ebbw Vale and an hour-long procession was held through the constituency, with hundreds of people lining the streets.