The man who was Tory treasurer when the party received hundreds of thousands of pounds in donations from Asil Nadir's Polly Peck business empire has called on David Cameron to hand back the "tainted" money.
Lord McAlpine said the Prime Minister had a a "moral duty" to return the political gift after the former fugitive tycoon was jailed for 10 years on Thursday.
The sentencing of Nadir, who donated £440,000 to the Tories during the 1980s, came a day after he was convicted of stealing £28.8 million from the global business he built from an east London textile company.
Urging the governing party to return the money, Lord McAlpine told The Daily Mail: "It is tainted money and it shames the Conservatives if they hang on to it. They have a moral duty to give it back."
He said the money should be paid to Nadir's creditors, some of whom lost their life savings when Polly Peck International (PPI) crashed leaving debts of £550 million.
Nadir, who was once 36th on the Sunday Times Rich List, was found guilty of 10 counts of theft from the Stock Exchange high performer between 1987 and 1990. The 71-year-old fled Britain for his native Northern Cyprus in May 1993 but returned voluntarily in August 2010 to face trial. The amount he stole is the equivalent of £61.6 million today.
Lord McAlpine, who was Tory Treasurer from 1975 when Margaret Thatcher became leader until her fall in 1990, added: "The moment he (Nadir) fled the country in 1993, to avoid criminal charges, it was obvious to me he was a complete conman. Frankly the Tories should have given the money back in 1993. But today the case is even clearer. There is a moral imperative for the money to be returned. The money was not Asil Nadir's to give although we thought it was at the time. Therefore the Tory Party has a duty to return it."
The peer said he was certain that Lady Thatcher would have ordered the party to return the money immediately if she was still leader. The Conservatives have insisted the donations were made by Polly Peck, rather than by Nadir, and they had seen no evidence the money was stolen.
However, Labour backbencher Simon Danczuk pointed to press reports from the 1990s which stated that a report by accountants Touche Ross in 1993 warned the Tory Party that £365,000 of the £440,000 it received in donations came from money defrauded from Polly Peck. A Conservative Party spokesman said they were not aware of the Touche Ross report and questioned whether it ever existed.
Following Lord McAlpine's comments, Mr Danczuk said: "With Asil Nadir behind bars, the Polly Peck creditors chasing them for repayment, and now the Tory treasurer who took the cash saying the party have a 'moral duty' to give the money back, the Tories' stance that they can keep these donations looks more ridiculous and desperate by the day. David Cameron's party should heed the warnings from their own side that holding on to this cash is 'shaming' - they should finally do the right thing and give it back."