He called for the Government to strengthen the elections watchdog, the Electoral Commission, and make the House of Lords wholly or predominantly elected.

His comments came after a senior frontbencher in his own party said it was "completely ridiculous" no charges were brought by the Crown Prosecution Service.

Environment spokesman Chris Huhne said the Government had "effectively been selling peerages and selling knighthoods".

Sir Menzies told BBC News24: "I think what we need now is a wholesale review of the law in relation to this matter.

"We need to have proper regulation that's properly enforced by a revamped, strengthened Electoral Commission and of course right at the heart of this is to have reform of the House of Lords so that it's either wholly, or mainly an elected chamber.

Mr Huhne told ITV1's The Sunday Programme he was surprised by the outcome of the police inquiry.

He said there was a "very strong" link between donations to Labour and honours.

"Every single person who gave more than a million pounds to the Labour Party since Tony Blair became leader has ended up either with a knighthood or with a peerage," he said.

"That is such a strong fact that for anybody to turn around and say 'We're not going to press charges' is frankly ridiculous."