Expenses letters from MP Denis MacShane cannot be used to prosecute him

"The effect was that, unbeknown to the (expenses) department, Mr MacShane was submitting invoices to himself and asking the parliamentary authorities to pay," the Commissioner said.

One letter from the MP to Mr Lyon in October 2009 described how he drew funds from the EPI so he could serve on a book judging panel in Paris.

"I was invited by Jacques Delors to join a committee to draw up a short-list for the European Book of the Year on which I still serve," he wrote.

"Again, there were no funds to cover the costs of travel and staying in Paris for these meetings and since I used them to try and advance the case of British writers, including helping to steer the committee to choose the work of British historian (redacted) in 2008 I thought it reasonable to use EPI money to cover these costs."

Mr Lyon also described how Mr MacShane had a "cavalier approach" to the use of public money in purchasing computer equipment which was not used solely in support of his parliamentary inquiries. In some cases departing interns were allowed to take away a parliamentary-funded laptop.

Mr MacShane also claimed for his own "extensive" travel across Europe, entertaining European contacts and building a "personal European library".

The Commissioner said Mr MacShane further breached the Code of Conduct by refusing to co-operate with his inquiry.

Mr MacShane blamed the British National Party, who were behind allegations against him and had won a "three-year campaign to destroy my political career".

"Clearly I deeply regret that the way I chose to be reimbursed for costs related to my work in Europe and in combating anti-semitism, including being the Prime Minister's personal envoy, has been judged so harshly," he said.

Scotland Yard dropped the case against Mr MacShane in July after receiving advice from the CPS on an initial evidence file.

The force said last night: "We are aware of the report and will be assessing its content in due course."

However, a senior Commons official said police would not be able to rely on Mr McShane's letters to the commissioner.

Clerk of the Journals Liam Laurence Smyth, who is responsible for parliamentary privilege issues, insisted the correspondence was protected because they were collected by the commissioner as part of parliamentary proceedings.

He admitted that many people would find the situation "surprising" but said privilege was necessary for Parliament to function effectively.

Even if Mr MacShane had openly admitted criminal behaviour in his evidence, the police would not be able to rely on the comments in court, Mr Laurence Smyth said.

He confirmed that police were not provided with any of Mr MacShane's evidence or the other information amassed by the commissioner when the Commons authorities referred the case to them in October 2010.

However, he suggested police may now be able to use the letters as a "map" to further their own inquiries.

Conservative MP Philip Davies called for the Met to reopen its investigation and expressed alarm that Mr MacShane was being protected by parliamentary privilege.

"I think that is a very sad state of affairs. All it will do is further undermine the reputation of parliament," he said.

"There will be millions of people out there who think that MPs are above the law and that is what the perception will be.

"It seems that someone who should be brought to justice isn't going to be."

It is understood Mr MacShane formally applied for the post of Crown Steward and Bailiff of the Chiltern Hundreds last night - the traditional way of resigning from the Commons.

Chancellor George Osborne is expected to confirm his appointment today, at which point he will cease being an MP.

It has emerged that three years ago, at the height of the expenses scandal, MPs voted down reforms that could have made evidence such as Mr MacShane's letters admissible in court.

Clause 10 of the Parliamentary Standards Bill made clear that parliamentary privilege should not knock out evidence simply because it related to "proceedings in Parliament".

However, the Commons narrowly voted to drop the measures in July 2009 amid concerns of a "chilling" effect on free speech.

A Government green paper on parliamentary privilege launched in April has again suggested changing the rules to ensure such evidence is admissible.

The document says "it is wrong in principle to deny the courts access to any relevant evidence when the alleged act is serious enough to have been recognised as a criminal offence".

It proposes removing privilege in all criminal cases, except where the alleged offence "related closely to the principal reason for the protection of privilege - i.e. the protection of freedom of speech and debate in Parliament".

Labour MP John Mann branded the idea that the documents should be protected by parliamentary privilege "nonsense".

"My interpretation of privilege is it's to prevent people suing over an allegation made in Parliament," he said. "I've had a lot of exchanges about privilege and the idea that it would have applied in this case, well, I don't think they have a leg to stand on."