Embattled British Prime Minister Gordon Brown on Thursday suffered his first Cabinet loss since taking office when a minister resigned amid allegations of funding irregularities.
Work and Pensions Secretary Peter Hain said he had "no alternative" after a complaint about his failed bid to become the governing Labour Party's deputy leader last year was referred to police.
He also resigned as Welsh Secretary, vowing to clear his name. James Purnell moves over from the position of culture secretary to replace him at work and pensions, but not in the Welsh Office, which will be led by Paul Murphy.
After issuing a fresh apology for failing to declare more than &POUND;100,000 (US$198,000) on time, Hain pledged to cooperate with the police and other inquiries.
Hain's position had become increasingly precarious since the row came to light last November, and he seemed virtually certain to quit after Brown appeared to give him only qualified support in an interview last week.
Although the prime minister said Hain made a mistake and there was no corruption, he described the situation as an "incompetence."
Brown told Hain in a letter made public by the prime minister's office: "I recognize that, given the circumstances and your desire to clear your name, this is the right and honorable thing to do."
Kenya-born Hain -- who came to prominence as a firebrand anti-apartheid campaigner in the late 1960s -- is the first minister to resign from Brown's government since he took over from Tony Blair as prime minister last June.
The 57-year-old faces the prospect of suspension from parliament if complaints are upheld that he failed to declare the funding to the Electoral Commission.
The main opposition Conservatives say he broke parliamentary rules, which require donations to be registered, and that his resignation was "inevitable."
Hain has blamed "poor administration" for the undeclared money rather than a coverup.
The row is a fresh blow for Brown as he seeks to claw back an opinion poll deficit from the Conservatives.
Their leader David Cameron, speaking at the World Economic Forum in Davos, Switzerland, told Britain's Sky News television: "He's made the decision today. I think it's the right one, but the prime minister shouldn't have allowed it to go on so long."
Brown's pledge to usher in greater trust and transparency in government took a hit late last year over revelations of illegal proxy donations to Labour.
The party was already seeking to recover from the effects of a previous scandal, in which Blair's administration was accused of illegally nominating wealthy donors to seats in parliament's unelected upper House of Lords.
That saw Blair become the first serving British prime minister in history to be questioned by police, although no charges were brought.