It was a peculiar spectacle … not least because every other one of Scotland’s 129 MSPs spent Saturday afternoon in a state of gobsmacked bewilderment trying to work out just why Watson – or Lord Watson of Invergowrie, to give him his full “peer of the realm” title – is to be quizzed by police for allegedly trying to set fire to a luxury hotel which was packed with politicians and journalists on Thursday night.

It is a scandal which has the potential to end in ruin. Anyone in the UK proved to be guilty of fire-raising would almost certainly find themselves spending quite considerable time behind bars at Her Majesty’s pleasure.

So what’s the story? How could a man who is the former MP for Glasgow Central, a life peer, a director of Dundee United and the current MSP for Glasgow Cathcart find himself on the receiving end of such incredible accusations?

To make the tale even more salacious the alleged fire-raising incident is set against the backdrop of what MSPs see as one of the most glamourous nights of the year – the Scottish Politician Of The Year Awards, sponsored by the Sunday Herald’s sister paper The Herald.

Here are the facts as they now stand: at about 2.16am on Friday morning a fire broke out on the ground floor of the sumptuous Prestonfield Hotel in Edinburgh. It was quickly put out and nobody was harmed, but staff were quick to pull out CCTV tapes from a camera that pointed right to the scene of the blaze in order to to check out what had gone on.

At 2.12am, according to the images on the tape, a man in a kilt was seen standing to the left of a curtain in the hotel reception room where the fire started. One minute later the person hunkered down at the base of some curtains. The kilted man then walked away from the curtains and out of the room at 2.14am.

Two minutes later, the man returned and looked at the curtains which were beginning to show a small tongue of flame licking around the edge of the drapes. The figure left again and, two minutes after that, the curtains were seen to be fully on fire and smoke was filling the room.

More than 400 guests had packed into the hotel, situated near Arthur’s Seat in the capital, dressed in their best bib and tucker. It was wall-to-wall ballgowns and tuxedos; the champagne was flowing and the free canapés were vanishing as quick as the staff could pile them on silver plates. Holyrood’s finest drank long into the night – ably assisted by the political press corps.

Booze lurks at the back of this bizarre saga. There have been allegations that Watson was angry because he was refused more alcohol by staff late on in the evening. However, friends of Watson say this was not the case.

Watson accepts that some of the footage shows him in the room where the blaze started. But he denies any wrong-doing. Of course, the blaze could have started due to faulty wiring or some other reason, but what is making this a jaw-dropping event for Holyrood insiders is the fact that the police now want to question Watson following complaints by staff at the hotel.

Whatever happened – whether the fire was started by accident or intent – people could have died as a result of the blaze. The hotel was packed with guests including STV newsreader Shereen Nanjiani and the actor David Hayman. To add to the danger, many of the party-goers had been drinking heavily and it was late at night.

Police have now taken the curtains away for examination. Perhaps the most sinister part of the story is that staff at the hotel say there was also an attempt to set another pair of curtains on fire in a different room, at around the same time as the main blaze was started. That attempt failed. It should be noted that Watson does not smoke and his friends say he did not have a lighter or matches on him that evening.

One guest, who recalls seeing Watson at around the time that the fire started, said that the MSP seemed “a bit glassy-eyed”. Watson had certainly been drinking on the night in question. His friends say he likes to party hard and enjoys a night on the town.

Watson is adamant that he’s done nothing wrong. He’s seen the CCTV tapes and maintains that the evidence is “not conclusive”. Referring to the figure walking around in the video footage, Watson said: “I can’t say that that’s me. I had a kilt on certainly. I’m not saying it’s not me, I’m saying it’s not conclusive.

“I don’t deny that I was in most of the rooms at some stage, I think. I don’t know which room that is, that’s what I’m saying, and I certainly categorically deny causing any damage whatsoever … I was aware of smoke, I remember smoke, I remember a fire alarm, that’s all.”

Later, he reportedly said: “I have seen four stills from the CCTV footage. One shows me going into the room and another coming out. The other two show someone else doing something which cannot be made out.”

Watson does, however, seem to have at least a partial alibi, in the shape of one of his friends, Malcolm Dickinson, editor of Holyrood magazine.

Dickinson said: “I spent most of the evening with him. He was only out of my sight for about two or three minutes. When we were in the cloakroom, he went to look for his coat. I then went into the lobby and he re-appeared. Three or four minutes later the fire alarm went off.

“A number of others say he was only away for two to three minutes as well. I can’t say what happened in those two or three minutes but he did come back with his coat.

“I have no idea what happened in the time that he was out of my sight. His demeanour was the same both before and after he left my company. He was pretty much the same as most of the other people at the event – he was jovial and joking. There were no cross words that I heard between him and anyone else.

“A lot of alcohol had been consumed by everyone but there was no raucous behaviour. By the end of the evening everyone seemed to have enjoyed themselves. There was nothing in the air to suggest any of this nonsense.”

Dickinson said that he “wouldn’t have said” that Watson was falling down drunk, adding: “There were others a lot more drunk than him. At that time of night [after 2am] I saw at least two people falling over, so others were worse for wear than he was.”

Regarding claims that Watson was angry because he was refused a bottle of wine late in the evening, Dickinson said: “He was given a bottle. I saw no disagreement over anyone getting drink.”

When the fire alarm went off, Watson was back with Dickinson. “He was beside me with maybe 30 other people,” Dickinson added. “Then he got into a taxi with Martin O’Neill [the Labour MP]. That was about 10 or 15 minutes after the alarm went off. There was no change in his demeanour after the alarm went off.

“I’ve spoken to him and he told me that he thinks the whole thing is completely bizarre. Most people I’ve spoken to see it as bizarre. He has been shown the stills and said the stills showed no wrong-doing on his part. But I imagine that he is rather concerned about the whole business – just as we all are.”

The Labour Party is staying tight-lipped about the entire embarrassing affair. “This is a police investigation into a very, very serious allegation,” a senior source said, “and if we took any action now it could be seen as us being prejudicial so it is highly unlikely that we will act until after the police inquiries. It depends on the outcome of the inquiries, where we go from there.”

Officially, Labour will only say: “Mike Watson denies any involvement in the alleged incident and is co-operating fully with the inquiry.” There have – as yet – been no official meetings between Watson and Labour Party officials. A Labour source added, however, that “private conversations” have taken place between Watson and senior members of the Labour Party machine.

Liberal Democrat members of the coalition were not so supportive of the beleaguered peer. While none wanted to speak on the record, they were all ready to predict a complete end to Watson’s political career. “The atmosphere within the LibDems is that if he did this, then he can’t survive as an MSP. But the big question is: did he do it?” one senior LibDem said. “No MSP could survive this. This is an accusation of fire-starting. People were asleep in their beds and could have been killed.”

Another prominent LibDem said: “The whole thing appears to be unbelievable, but if it did happen it would end his career in politics for good.”

Colin Rennie, a close friend of Watson’s and a long-time member of the Labour Party, stood by the peer last night. He said: “I’ve known Mike for 30 years, and what is being implied about him is a million miles away from his real character.

“He is not a man who would act like this with or without drink. He is really good natured when he has had a few drinks.”

Pals of Watson’s at Dundee United are also standing by him. One very prominent official at the club said: “I spoke to Mike today at Tannadice and he was defiant and coping well with the situation. He has made his position clear and he has nothing to add to that. At the moment these are unproved allegations.”

The owners of the Prestonfield House Hotel say they are unable to comment as the matter is now the subject of a police investigation. The police say that they have started an inquiry the results of which “will determine whether a criminal act took place”.

14 November 2004