Police are investigating claims that an Australian Labour MP used union credit cards to pay prostitutes at a Sydney brothel.

It is alleged that Craig Thomson spent $2,500 (£1,600) of union cash at a brothel when he was in charge of the Health Services Union in 2005 – two years before he became an MP.

Thomson has denied the allegations, arguing that another man used the card and forged his signature. The man, who has not been named, later repaid the money.

The allegations could force Thomson to resign, which would mean that Gillard's already unpopular government will lose the next by-election. On Tuesday, Thomson resigned from the parliamentary economics committee.

Shadow attorney general George Brandis said new evidence had come to light which suggests that Thomson had committed criminal offences including fraud.

"The overwhelming weight of evidence suggests that Thomson himself received, signed for and authorised payment for the services," Brandis wrote to police.

Brandis said that a forensic handwriting expert had confirmed that the voucher used to pay for the prostitutes was probably signed by Thomson – not the unnamed man.

Thomson said: "I continue to reject claims of wrongdoing."