The review was instigated after new details emerged about the peer's contact with Jeffrey Epstein and a separate police investigation was launched in the UK, they said.

The Labour peer is thought to have been given a pay-off of up to £40,000 after he was sacked as the UK's ambassador to the US in September over his links with the late convicted sex offender.

Work and Pensions Secretary Pat McFadden told the BBC's Laura Kuenssberg that Mandelson should "either return [the money] or give it to an appropriate charity".

No 10 sources earlier also called for Mandelson to pay the money back or give it to a charity that supports victims.

Mandelson's lawyers have been approached for comment.

The review comes after police searched two homes linked to Mandelson on Friday, following the latest release of the Epstein files in the US, which indicated email exchanges had taken place between him and Epstein about fiscal policy. Mandelson has not been arrested.

Government sources confirmed that the Foreign Office reached a financial settlement with Mandelson, but have not said how much this was for.

However, he is believed to have been given an exit payment equivalent to three months' salary according to the Times. While his salary as US ambassador has not been disclosed, the post typically has a salary of £155,000-£159,999. This would put a three months' pay-out at around £40,000.

It's understood the exact payment and the reasons for making it will be made public, after parliament decided on Wednesday that ministers should release government files and electronic communications about Mandelson before and during his appointment as ambassador to Washington.

A Foreign Office spokesperson said: "Peter Mandelson's civil service employment was terminated in accordance with legal advice and the terms and conditions of his employment.

"Normal civil services HR processes were followed. Further information will be provided to Parliament as part of the government response to the motion passed last week which is being co-ordinated by the cabinet office."

Mandelson's association with Epstein - and the fact he remained in contact with the financier after the latter was convicted - was known at the time of his appointment in December 2024.

However, the peer was sacked from the role after Downing Street said new information about the depth of this relationship had emerged - including emails showing he sent supportive messages to Epstein as he faced charges for sex offences in 2008.

Email exchanges in the latest US government release in January on Epstein included those while Mandelson was a member of Gordon Brown's cabinet.

Among them is one that indicates Lord Mandelson gave Epstein advance notice of a €500bn bailout by the EU to save the Euro in 2010.

Another included a 2009 memo in which Brown's policy adviser Nick Butler wrote about the UK's struggling economy and recommended selling off government-held assets to raise public funds.

The Metropolitan Police is currently investigating the peer over allegations of misconduct in public office.

Mandelson has not responded to requests for comment but the BBC understands his position is that he has not acted in any way criminally and that he was not motivated by financial gain.

Deputy Assistant Commissioner Hayley Sewart said enquiries were ongoing.

"This will be a complex investigation requiring a significant amount of further evidence gathering and analysis. It will take some time to do this work comprehensively and we will not be providing a running commentary."