PUP leader David Ervine said sanctions were unjust

He was speaking after the NI secretary said he intended to withhold its assembly allowances for another year.

The decision followed the latest report from ceasefire watchdog, the Independent Monitoring Commission.

The PUP is linked to the UVF and Red Hand Commando. Mr Ervine said it was "unjust" to punish his party for the alleged activities of the UVF.

He said the leadership of his party were not in leadership positions in the UVF and did not carry out illegal activity.

"I am the leader of the PUP. If I have broken any laws or rules, I would like to be arrested and charged now," he said.

In a written statement to MPs, Secretary of State Peter Hain said he would give the PUP a week to respond.

Mr Hain's decision came amid pressure from nationalist politicians to declare that the UVF has ended its ceasefire following recent violence by the organisation.

The IMC report, submitted in May, said the UVF and Red Hand Commando remained active, violent and involved in organised crime.

Peter Hain intends to continue withholding the PUP's allowances

Mr Hain said the report concluded that the PUP had not done as much as it should to exert influence on the groups to end such activities.

"The commission recommended that I should continue the financial measures against the Progressive Unionist Party," he said.

"I have considered carefully the IMC's report and I have today written to the Progressive Unionist Party to advise them that I am minded to remove for a period of 12 months the party's entitlement to financial assistance payable to political parties in Northern Ireland.

"I have provided the PUP with seven days from today to make representations to me.

"At the end of that period I will take into account any such representations made to me and will reach a final decision."

SDLP assembly member Alban Maginness said Mr Ervine had "descended to the level of Adams-style political stunts rather than confront the reality of what the UVF is about".

He said Mr Ervine's challenge to the secretary of state to arrest him was "designed to divert attention from the very real issues that people who associate with paramilitaries should face up to".

On Tuesday, Mr Maginness had urged the PUP to sever its ties with the UVF, following the group's bitter feud with the rival Loyalist Volunteer Force.