Housing Secretary Robert Jenrick acted properly and with propriety over his approval of a £1bn property scheme in East London, the government says.
Mr Jenrick approved the scheme 14 days before the developer gave the Conservative Party £12,000.
Labour said the sequence of events raised “cash for favours” concerns.
Junior housing minster Chris Pincher, answered Labour’s urgent question on the matter on Mr Jenrick’s behalf, insisting he had acted “fairly”.
Mr Jenrick granted permission on 14 January for Richard Desmond’s company Northern & Shell to build on the Westferry Printworks site on east London’s Isle of Dogs.
Mr Desmond made a personal donation to the Conservatives two weeks later, on 28 January.
The property development was approved the day before the introduction of a new council community levy which would have meant the company paying an additional £40m.
And Mr Jenrick has come under growing political pressure in recent weeks after it emerged he sat at the same table as Mr Desmond, the former owner of the Daily Express, at a Conservative Party fundraiser last November.
Labour’s Mr Reed told the House of Commons: “By an astonishing coincidence, just two weeks after the secretary of state took his decision Mr Desmond made a generous donation of £12,000 to the Conservative Party.
“This sequence of events raises grave concerns about cash for favours.”
He added: “The public needs reassurance that the integrity of the planning process cannot be auctioned off at Conservative Party fundraising dinners.”
But Mr Pincher said Mr Jenrick had “no relationship” with Mr Desmond and had made it “absolutely clear” to the businessman at the dinner “that he could not discuss planning matters, that he would not discuss that planning matter and the issue was closed”.
He added: “I have no idea what Mr Desmond asked for at that dinner, where he wished to be seated or who made the decision where he was seated, and the reason why is because ministers in my department and others do not know what donations or funds are being spent by donors on political parties.
“There is a firewall quite properly between the two.”
Mr Pincher said: “This government is committed to maintaining public confidence in the probity of the planning process at all levels.”
He added that, “at all times”, Mr Jenrick had acted within the rules.
The secretary of state did not attend the Commons for the question, with Labour accusing him of avoiding scrutiny.
A source close to Mr Jenrick told the BBC he would take questions from MPs during his usual Commons timeslot next Monday.
In approving the Isle of Dogs project, Mr Jenrick overruled the Tower Hamlets planning inspector, who said it needed to deliver more affordable housing in London’s poorest borough.
The council has since challenged the decision, forcing the secretary of state to back down and to admit what he did was “unlawful by reason of apparent bias”.
Councillors asked the High Court last month to order the government to disclose emails and memos around the deal.
Rather than doing this, Mr Jenrick’s lawyers conceded the timing of his decision “would lead the fair-minded and informed observer to conclude that there was a real possibility” that he had been biased.
Mr Jenrick has insisted there was no actual bias towards Mr Desmond but said it was right for the decision to be revisited to “ensure there was complete fairness”.
A spokesman for the Department of Housing, Communities and Local Government said that, while “we reject the suggestion there was any actual bias in the decision, we have agreed that the application will be re-determined.”
Mr Desmond has, in the past, donated money to both Labour and UKIP.
Northern & Shell, of which he is the majority shareholder, sold its publishing interests in 2018 and now focuses largely on property development as well as digital ventures and the Health Lottery.
The £12,000 Mr Desmond gave to the Conservatives was included in Tuesday’s Electoral Commission audit of party donations for the first three months of the year and first reported by the Daily Mail.