Hundreds of MPs could be forced to stop employing close relatives after Harriet Harman admitted the practice threatened public confidence in politics.
The Commons Leader warned the public would no longer tolerate the suspicion that members were using allowances to line their families' pockets.
The comments, in evidence to a crucial inquiry into the discredited Westminster expenses system, came as fallout from the scandal continued.
Communities minister Shahid Malik faces a second formal investigation over his housing and office arrangements, Livingston MP Jim Devine was barred from standing as a Labour candidate at the next election by the party's endorsements panel, while Tory backbencher Ian Taylor said he would be standing down at the next General Election.
Opening the Committee on Standards in Public Life's first evidence session, chairman Sir Christopher Kelly hit out at MPs for lacking principles and exploiting expenses "for personal gain".
He insisted politicians needed to display qualities including selflessness, integrity and honesty.
"These values are timeless," he said. "If they had been followed more by more MPs over the past few years we would not be in the situation that we are."
Ms Harman was challenged by the committee over why action had not already been taken to stop MPs getting big pay-offs if they had been effectively forced out over expenses claims.
Ms Harman said: "I think it was because we did not want to create a perverse incentive.
"I think what had happened was that an MP who wanted to resign or retire had gone and stood somewhere else in a place they were not going to win. We don't want a perverse incentive not to resign or retire."
