David Cameron is facing fresh questions about his decision to hire Andy Coulson in 2007 after it was reported that his former communications director received several hundred thousand pounds from his former employer News International after he was hired by the Conservative party.

The BBC's Robert Peston said that Coulson received cash payments from the company until the end of 2007 after his resignation as editor of the News of the World in January of that year.

Coulson resigned after Clive Goodman, the former royal editor at the paper, which was closed last month, was jailed for illegally intercepting voicemail messages.

The title's owner News International allegedly agreed to honour the remainder of Coulson's two-year contract, and the money was paid in instalments. Coulson also continued to receive other benefits, including private health insurance and a company car, for several years.

He took up his post as director of communications at the Conservative party in July 2007.

The alleged payments ended before Cameron became prime minister but the fact one of Cameron's closest advisers was receiving money from News International after he started work for the Tories will cast doubt over Coulson's impartiality. The spotlight will again fall on Cameron's close ties with the Murdoch media empire because of the revelations.

Conservative party sources insisted on Monday night they had no knowledge of any News International payments made to Coulson, after checks were made with every senior party official who might have been involved in hiring him in 2007.

Rumours of a financial relationship between Coulson and News International have circulated for some time. It is understood that, prior to him standing down as director of communications in January this year, party officials had asked Coulson directly whether he had received payments from News International during the period he had worked for them. They were seemingly confident enough to give the "categorical" assurances that he hadn't as recently as last month.

On 12 July, when asked by the Guardian, a senior Conservative party official said: "We can give categorical assurances that he wasn't paid by any other source. Andy Coulson's only salary, his only form of income, came from the party during the years he worked for the party and in government."

Coulson was asked by the Commons culture, media and sport committee in 2009 whether he had received a payment from the company. He told MPs it was a private matter but added he would be prepared to discuss it privately with John Whittingdale, the Conservative MP who chairs it.

In February, the Conservative party spokesman, Henry MacRory, told the Guardian: "I'm 100% satisfied that there is no truth in the suggestion that Andy was bankrolled by News International or by anybody else."

And Michael Spencer who was party, treasurer said: "I have no knowledge of it and would think it is highly unlikely that there was any such arrangement."

Labour MP Tom Watson, who sits on the culture, media and sport committee, said the money could be classed as a donation to the Tory party which should have been declared to the Electoral Commission.

"This is a remarkable revelation" Watson said. "Not only was Coulson being paid when he gave evidence to the committee, he failed to declare it. I will be writing to the electoral commission to invite them to look into this."

Under electoral law both the donor and recipient are obligated to report donations, meaning that if the payments are interpreted as donations in kind to the party, both News International and the party could face sanctions.

On Monday night Watson, who has vigorously pursued the hacking affair and emerged as one of Rupert Murdoch's most trenchant critics, also said: "We need to be certain that everyone involved in hiring Andy Coulson was not aware of these additional payments from NI. We need a cast iron guarantee nobody knew."

The allegations raise more questions about how closely Coulson was scrutinised by Cameron and his team before he was offered the role as one of the future prime minister's most senior advisors and whether he was subjected to the appropriate checks.

It emerged earlier this year that Coulson did not receive the same security clearance as officials of similar seniority after he entered Downing Street.

A Labour spokesman said: "David Cameron now faces allegations that one of his top advisers was also in the pay of News International. The prime minister needs to immediately make clear whether these allegations are true.

"There are serious questions to answer about Mr Coulson's employment in Downing Street and the country should not have to wait for full transparency."

News International paid off Clive Goodman, who received in £242,000, after he threatened to sue the company in 2007. Glenn Mulcaire, the private investigator who worked for the company, also received a payment. Both men are believed to have received their settlements in instalments.

A spokesman for News International said on Monday night: "News International consistently does not comment on the financial arrangements of any individual."

MP's questions

The exchange between Andy Coulson and Tom Watson MP when Coulson gave evidence to the culture select committee on 21 July 2009:

Tom Watson Just one last round of questioning. You knew that you were going to resign before sentencing, but on the day of sentencing you resigned from the paper.

Coulson I actually resigned two weeks before I announced it.

Tom Watson Two weeks before. And did you get a redundancy payment for that?

Coulson I got what was contractually due to me. Obviously I did not work my notice so I received what was contractually due.

Tom Watson Then you were six months out of work.

Coulson About five months.

Tom Watson And then you went to work directly for the Conservative party.

Coulson That is right.

Tom Watson And you have not got any secondary income other than that have you?

Coulson No.

Watson So your sole income was News International and then your sole income was the Conservative party?

Coulson Yes.

Tom Watson: That is great, thank you.