Labour acted "with complete integrity' in its dealings with the Co-op Bank and disgraced ex-chairman Paul Flowers, party leader Ed Miliband has said.
Mr Flowers, 63, a former Labour councillor, is being investigated by police after he was filmed apparently buying drugs.
The government is to order a full inquiry into how Mr Flowers was deemed a suitable chairman of the bank.
Mr Miliband said he was "utterly confident" about Labour's actions.
David Cameron has accused Labour of knowing about the past of Mr Flowers "all along".
'Inappropriate' imagesMr Flowers apologised after a video on the Mail on Sunday website showed him handing over £300 in a car, apparently to buy cocaine.
Analysis
Number 10 is straining to tarnish Ed Miliband by association.
Paul Flowers was unqualified to run a bank that was almost destroyed. Pornography was found on his computer in 2011 when he was a Labour councillor.
And he is now being investigated for allegedly buying crystal meth, cocaine and ketamine.
On these facts, the political parties at Westminster agree.
But because of Labour's relationship with the co-operative movement and Paul Flowers' former role on an advisory group to the Labour leader, David Cameron accused Labour in the Commons yesterday of knowing about Mr Flowers past all along.
This is now a highly political fight between the Conservatives and Labour.
It has since emerged that while Mr Flowers was a Labour councillor in Bradford in 2011, what the council called "inappropriate but not illegal adult content" was found on his computer. He resigned.
Mr Flowers, who has been "suspended indefinitely" from his post as a minister in the Methodist Church, stood down as chairman of Co-op Bank and deputy chairman of Co-op Group in June.
In the Commons on Wednesday, Mr Cameron questioned Mr Flowers' suitability for the role of Co-op bank chairman and his links with Labour.
"Why was Reverend Flowers judged suitable to be chairman of a bank? Why weren't alarm bells rung earlier, particularly by those who knew?" he said.
But Mr Miliband questioned the Conservatives' own ethics, saying they had accepted money from tax exiles.
In an interview with ITV News on Wednesday, Mr Miliband said Mr Flowers was "somebody who I met with on one occasion and had meetings with a wider group on a couple of other occasions".
"He was never my close adviser," he added.
"But the important thing now is to make sure that the Co-op can go from strength to strength in the future and the police need to look at any matters that arise for them."
Fresh accusationsAsked if Labour supported an independent inquiry into Mr Flowers' appointment, Mr Miliband said: "Well let's see what the government proposes but, look, what I'm utterly confident about is the Labour Party always acts with the utmost integrity and we did on this occasion too."
Asked if he thought the government had called the inquiry in order to try to embarrass him, Mr Miliband said: "I'll leave David Cameron to do what he wants to do.
Labour and Co-op Group
- February 2010 - Paul Flowers attends Downing Street reception, with Ed Miliband present
- April 2010 - Mr Flowers appointed chairman of Co-op Bank and vice-chairman of Co-op Group
- September 2011 - Mr Flowers resigns as Labour councillor in Bradford after pornography is found on his council laptop
- 31 March 2012 - Co-op Group donates £50,000 through Labour Party to support shadow chancellor Ed Balls's office
- 6 March 2013 - Ed Miliband meets Mr Flowers to discuss banking reform
- 1 April 2013 - Labour takes out £1.2m loan from Co-op Bank, to be repaid by 2016
"What I can say with absolute clarity is we've acted with complete integrity on this issue."
Fresh accusations about Mr Flowers have been published in Thursday's Daily Mail, which says he resigned from running a drugs charity after allegedly lodging false expenses claims.
The BBC has not independently verified this claim.
The inquiry into the Co-op is to be ordered by George Osborne and arranged by the Prudential Regulation Authority under powers the chancellor obtained in the 2012 Financial Services Act, the BBC's Robert Peston reported.
Our correspondent said that when Mr Flowers appeared before the Treasury Select Committee of MPs on 6 November, he appeared to have "no grasp" of "basic" facts about the bank.
Mr Flowers had never worked in the banking sector in "any senior capacity", he said, but had been appointed chairman of the Co-op Bank as a result of a "power struggle within the co-operative movement".
The independent inquiry cannot begin until police have concluded their investigation into allegations that Mr Flowers bought and used illegal drugs.
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