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Mr Watson is expected to be put forward by Labour leader Sir Keir Starmer in a new list of peerages being prepared by Prime Minister Boris Johnson. The former deputy Labour leader was nominated for a place in the House of Lords earlier this year by ex-Labour leader Jeremy Corbyn.
But Mr Watson is understood to have been rejected over his role in highlighting false claims by the fantasist Carl Beech of a VIP paedophile ring in Westminster which sparked the bungled Operation Midland.
Allies of Mr Watson insisted he should not be blocked from getting a peerage.
A source told The Sunday Telegraph: “Tom has been assuaged from any concerns.
“They will put him forward and the argument will be made that there are people who have got into the Lords who have equally blemished records.”
But former Conservative MP Harvey Proctor, who was falsely accused of murder by Beech, blasted handing Mr Watson a peerage as “cronyism”.
He said: “It would be quite outrageous for Tom Watson – for all he did with Operation Midland, all he did to support Carl Beech, all he did to put pressure on the Metropolitan Police with regard to Operation Midland.
“It would be outrageous for Keir Starmer to push for Tom Watson to get a peerage.
“Tom Watson should retire to the countryside and take up needlework.”
Speaking last year, the former deputy Labour leader admitted he was “very, very sorry” for how events turned out but stopped short of apologising to those who were wrongly accused.
He said at the time: “I hate to see people in pain.
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“I genuinely feel very deeply for the people who have had injustices done to them as a result of the failed police inquires – I really do.
“I understand why they are angry and I understand why some of the anger is targeted at me.
“I don’t want people to feel sorry for me, but I don’t want people to question my motives either.
“I did my best, that’s all you can do in life.
“I am genuinely very, very sorry that the inquires didn’t go the way they did.
“I genuinely was trying to do the right thing.”
A review by the retired High Court judge Sir Richard Henriques found Mr Watson’s interest in the case put pressure on police in Operation Midland to pursue Beech’s allegations.
Beech was jailed for 18 years in July 2019 after being found guilty of 12 counts of perverting the course of justice and one of fraud.
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