THE Government was last night facing mounting pressure over its handling of the Hinduja passport affair after former Northern Ireland Secretary Peter Mandelson was cleared of any impropriety.

The Hammond Inquiry into the granting of naturalisation applications of two of the billionaire Hinduja brothers declared they had won their passports fairly without any improper ministerial involvement.

But it failed to clear up confusion surrounding the circumstances of Mr Mandelson's resignation.

And the Government has not explained why it got so close to Srichand and Gopichand Hinduja, who are being investigated in India over their alleged role in an arms scandal.

Sir Anthony Hammond QC said it was "likely" that Mr Mandelson had, in 1998, telephoned the then immigration minister Mike O'Brien over Srichand Hinduja's application.

But he accepted the former Ulster Secretary's honestly-held belief that he did not remember the call.

That left Westminster wondering why a minister cleared of any wrongdoing had been forced to resign in January.

Sir Anthony also concluded, in his eagerly-awaited 73-page report, ordered by Prime Minister Tony Blair on the day of Mr Mandelson's resignation, that Europe Minister Keith Vaz had done nothing improper by making representations on behalf of the brothers.

Mr Mandelson quit the Government on January 24 after giving conflicting accounts of events surrounding the disputed phone call.

The Hinduja brothers' foundation had given £1m to help sponsor the Faith Zone in the Millennium Dome, but the inquiry found there was no link between that and the brothers' attempts to gain naturalisation.

Mr Mandelson said after the report's publication: "At long last I can put this whole thing behind me and start afresh."

He added: "Sir Anthony's report establishes that I did not lie, that I did not deceive, that I did not set out to mislead.

"For reasons I hope people will understand, I do not desire a return to government."

Instead, he would seek re-election as a Hartlepool MP and serve Labour in other ways.

Prime Minister Tony Blair said: "I said to people right at the beginning that this was a tragic case and I said I believed Peter would be cleared of any impropriety.

"I am very pleased, for his sake, he has been and I hope he will be able to get on with rebuilding his life."

But Tory leader William Hague said: "This whole bizarre chain of circumstances would never have happened at all had the Prime Minister not re-appointed Peter Mandelson to the Cabinet just ten months after the first occasion when he had to resign in disgrace."

Shadow Home Secretary Ann Widdecombe said the report left "a rather nasty smell" about the Government. And Liberal Democrat MP Norman Baker, whose parliamentary questions first exposed Mr Mandelson's involvement in Srichand Hinduja's naturalisation application, said: "The focus of Sir Anthony's inquiry has been far too narrow.

"The report does not address key questions that strike at the very heart of the Whitehall machine."

Sir Anthony said that while the naturalisation of Srichand and Gopichand Hinduja had been "handled properly and within the established criteria", intelligence information about the brothers had not been passed to the Home Office.

His report details how Cabinet Secretary Sir Richard Wilson, Mr Blair's Chief of Staff Jonathan Powell and his Press Secretary Alastair Campbell were all dragged into the affair as Mr Mandelson first said he had not been personally involved in Srichand's application, then appeared to concede he had - then said he could not recall the telephone call to Mr O'Brien.

In the meantime, Culture Secretary Chris Smith had inadvertently misled MPs by repeating Mr Mandelson's first statement that he had no personal involvement, and Mr Campbell had told lobby correspondents the same thing - only for both to have to retract their statements the next day