Mr Davies resigned from the Cabinet after reporting to the police that he had been robbed at knifepoint on a housing estate in Brixton after agreeing to go to a flat with a complete stranger and two accomplices, a man and a woman who stole his car, his wallet and his private telephone, leaving him standing at the roadside.
The speed with which Mr Blair accepted Mr Davies's resignation contrasted with the drawn-out departures of former Tory ministers, but left colleagues bemused and still searching for the full story behind the reasons for his departure. No Government documents or other official papers were in the car when it was stolen.
Mr Davies, who is married, with a 12-year-old daughter, said: "It was an error of judgement on my part to put myself in a position where I could be a victim of a crime. I have accepted responsibility for that."
The Prime Minister met Mr Davies at 11am and they discussed his resignation for 45 minutes, but many MPs remained unaware of the situation until it was announced at 4pm.
The Prime Minister's official spokesman refused to go into detail beyond the exchange of letters between Mr Davies and Mr Blair, but denied there had been any sexual encounter at Clapham Common.
The spokesman said: "He has concluded that it was foolishness of a nature that he should resign. He was shocked and upset and just angry with himself at the embarrassment this would bring on the family, himself and the Government.
"As he describes it himself, he said he went out on Clapham Common because he was feeling under pressure, needed a bit of air. He had spent the weekend dealing with the floods."
But close friends and associates said apart from being irritable yesterday morning, he was not stressed over his work. "He had just been chosen by the Labour Party as First Minister for the Welsh Assembly. He was on a high," said one friend.
In his letter of resignation, Mr Davies said he had parked his car near his home in Clapham and went for a walk on the common. "Whilst walking, I was approached by a man I had never met before who engaged me in conversation.
"After talking for some minutes, he asked me to accompany him and two of his friends to his flat for a meal. We drove, in my car, to collect his friends, one male, one female. Shortly afterwards, the man produced a knife and together with his male companion robbed me and stole my car, leaving me standing at the roadside."
Mr Blair's reply warmly congratulated Mr Davies for his work in Wales. He was widely regarded as having helped secure the "yes" vote in last year's Welsh referendum, after changing his mind on the issue.
His replacement as Welsh Secretary will be Alun Michael, a Home Office minister and MP for Cardiff South and Penarth.
Clive Soley, chairman of the Parliamentary Labour Party, said: "Mr Davies has done the right thing. He did it quickly. He recognised it was an impossible situation for a minister to be in and everyone will hope he will sort out any problems he may have." Peter Hain, a former colleague at the Welsh Office, said: "We are all astounded and shocked."
Mr Davies has yet to decide whether to withdraw his candidacy for leadership of the Welsh Assembly, but Labour colleagues said they thought it was likely he would. Liam Fox, Tory spokesman on constitutional affairs, said he should not pursue his bid because the public "would find that inconsistent to an unacceptable degree".
Mr Davies was regarded as a mercurial figure, who was "gaffe prone" - he had to apologise in Opposition after criticising the Prince of Wales. Colleagues described him as a left-winger who never lost his rebellious streak.
Ann Clwyd, a Labour MP who has known him for 35 years, said: "We cut our political teeth together. I am really sorry. He delivered the `yes' vote for Wales."