A Tory donor lobbied the Government to cancel the £80 million loan to Sheffield Forgemasters, it has been claimed.
Andrew Cook, chairman of engineering firm William Cook Holdings wrote to Conservative Business Minister Mark Prisk calling for the funding to be withdrawn.
The loan to build nuclear power station components was agreed under Labour, but cancelled as part of the coalition's efforts to rebalance the nation's finances.
In a short Commons debate Labour's Angela Smith (Penistone and Stocksbridge) produced the letter from Mr Cook which she had obtained following a Freedom of Information (FoI) Act application.
She said: "I have here correspondence released as the result of an FoI request which indicates that Andrew Cook, of William Cook Holdings, wrote to the Government urging the cancellation of the loan.
"This approach, from a major donor of the Tory party, seems to provide the only basis for the Government's decision to cancel the loan."
Her colleague Clive Betts (Sheffield SE) read extracts of the document to the chamber. e said the letter, dated May 25, began: "Dear Mark ... I am the largest donor to the Conservative Party in Yorkshire and have been since David Cameron was elected leader. I am delighted that you are at last back in power, albeit in coalition."
Mr Betts added: "It goes on in the letter to say 'I have specialist knowledge of the situation that I would like to share with you confidentially'."
Mr Betts claimed Mr Cook wrote: "The loan is probably unnecessary and possibly illegal under EU rules. I believe the private sector can provide the required finance without the taxpayer shelling out. It's a typical Labour sacred cow."
Mr Prisk said the letter was "noted" but had "no bearing on the decision-making process". The debate followed angry exchanges during Prime Minister's Questions when Mr Clegg was forced to defend the decision under sustained questioning from shadow justice secretary Jack Straw.
