The Electoral Commission confirmed reports in the Sunday Mirror and Sunday Telegraph that it was mounting a formal investigation into the donations made by Bearwood Corporate Services.
A spokesman said: "We have begun a formal investigation into whether there has been any failure to comply with the Political Parties, Elections and Referendums Act in connection with a number of donations made to the Conservative Party by Bearwood Corporate Services."
Lord Ashcroft, the party's deputy chairman, has paid millions of pounds to the party through Bearwood, a UK-registered company.
However Labour MPs have long questioned whether the donations complied with strict laws banning overseas' donations.
Lord Ashcroft was partly brought up in Belize and he reportedly still has extensive business interests in the former British colony. He has consistently refused to say whether he is resident or pays taxes in the UK.
The Tories insisted that they were satisfied that the donations were both "legal and permissible".
"The Conservative Party compliance unit applies two strict tests to all company donations in accordance with Electoral Commission guidance," a party spokesman said.
"They are: is the company UK registered and is the company trading? The donations from Bearwood Corporate Services Ltd met those tests and were therefore legal and permissible."
However John Mann, one of the Labour MPs pressing for an inquiry into the Bearwood donations, welcomed the confirmation that there would now be a full investigation. "Tax exiles should not be allowed to give money to influence the results in British elections," he told a newspaper. http://www.google.com/hostednews/ukpress/article/ALeqM5idej1QwZE2kQ7NdT_t78-XR2XRGg