A leading Lib Dem donor and his son have been identified as the two men arrested over Rolls-Royce's dealings in Asia.
A spokesman for Sudhir Choudhrie, who holds British citizenship, and his son Bhanu confirmed a report in the Financial Times of their arrest by the Serious Fraud Office (SFO) in relation to a bribery investigation.
The SFO said on Wednesday it had arrested two men in connection with one of its investigations, but did not disclose their identities. Both men have denied any wrongdoing and have been released on bail, their spokesman said today.
"The allegations made against Bhanu and Sudhir Choudrie are strongly denied. Full cooperation is being given to the authorities," their spokesman said.
The SFO, Rolls-Royce and the Liberal Democrats declined to comment.
In December 2012, Rolls-Royce gave information to the SFO relating to alleged bribery and corruption involving intermediaries in overseas markets and said it could face prosecution.
The aerospace and defence group said in December last year that the SFO had launched an investigation into concerns about possible bribery and corruption in China and Indonesia.
The Choudhrie family founded C&C Alpha Group, a London-based firm that invests in healthcare and hospitality, according to the company's website. Bhanu Choudhrie is the firm's executive director.
Since 2010, C&C Alpha has donated almost £500,000 to the Liberal Democrats and Sudhir Choudhrie has donated a further £155,000 to the party since 2006, according to Britain's Electoral Commission.
The SFO investigation comes at a tough time for Rolls-Royce, the world's second-largest maker of aircraft engines behind General Electric.
Its shares suffered their biggest one-day plunge for more than 13 years on Thursday after the company said defence cuts in the US and Europe would halt its decade-long run of profit growth this year.