Italian police are investigating after a £4.7 billion grand project to build flood defences in Venice became mired in allegations of extortion, money-laundering, illicit party funding, fraud and other corruption.

Fourteen people have been arrested, and 100 contractors, architects and engineers placed under judicial investigation for their part in the Moses Dam fraud.

The 'father' of the project, Giovanni Mazzacurati, 81, was forced to step down as head of the consortium responsible for building the barrier, following his arrest.

Even the Mayor of Venice, Giorgio Orsoni, has become embroiled in the scandal, though the prosecutor said he was not a suspect.

Mazzacurati is accused of bribing politicians and local government officials, diverting money to pay them off through a slush fund set up with fake invoices.

He is said to have contributed funds to Orsoni, the centre-left mayor of the city who is described as an "old friend" of Mazzacurati .

Another consortium executive, Pio Savioli, is under house arrest after he was taped in a phone intercept boasting: "We are benefactors of the state because we did the works for free, because we paid all the Italian politicians, all the Italian authorities."

The investigation into the financial conduct of the Consorzio Venezia Nuova began under the government of Mario Monti, which ended earlier this year.

Mazzacurati, whose leadership of the consortium was described as "masterful", is accused of rigging the tender process to award contracts to favoured firms. He was arrested in a dawn raid on 12 July by Venice's fiscal police.

The first stage of the dam project has now been completed, with four 300-ton gates lowered into place between the lagoon and the Adriatic Sea.