The Chairman of the Committee on Standards in Public Life had agreed to act as barrister for Dame Shirley, who is facing a pounds 27m surcharge over a "homes for votes" scandal at Westminster City Council.
Lord Neill said in a statement that he had pulled out of the case because of a "perceived conflict" between his role as her lawyer and as chairman of the committee. He had already obtained leave for her to appeal.
"I have advised her that continuing prejudicial comment concerning my representation of her would be damaging to her interest. In the light of a perceived conflict between my two roles such comment would also be likely to impede the work of the Committee on Standards in Public Life, of which I have the honour to be chairman," he said.
Dame Shirley issued her own statement expressing anger at attacks on Lord Neill over the issue.
"I very much regret that as a result of a political vendetta the Court of Appeal will now be deprived of the opportunity to hear his advocacy and arguments on my behalf. Certain Labour MPs who used similar harassing tactics when opposition members on Westminster Council have again ruthlessly used the media to poison the atmosphere around this case," she said.
The announcement came just after MPs voted to write to Lord Neill to ask him to explain his decision to take on the case.
The Commons' public administration committee agreed in private session to make the approach after a request from one of its members, the former deputy leader of the Westminster Council Labour group Peter Bradley (The Wrekin.)
Earlier, Mr Bradley said the committee might call Lord Neill to make a personal appearance on the matter. He said the peer should withdraw from Dame Shirley's legal team.
"He may think that conflicts of interest do not arise - that is not how the rest of the world sees it.
"It is crucial given his position as the chairman of the Committee on Standards in Public Life that he is not only above reproach but is seen to be above reproach," he said.
Another senior Labour MP, David Winnick, welcomed the decision to withdraw, but said Lord Neill should never have put himself in such a position.
"There was clearly a potential conflict of interest. If he had continued as counsel (for Lady Porter), then clearly there would have had to be a question mark over his continuing as chairman of the Committee on Standards in Public Life," he said.
Lord Neill last week insisted that he was taking the case in the Court of Appeal on the "cab-rank principle" whereby barristers took cases as they emerged.
He said members of the bar did not pick and choose their cases on the basis of the popularity or unpopularity of the case or the client.
Downing Street had responded to growing media unrest over the affair last week by saying that it was a matter for Lord Neill, and not a matter for the Government.
Lord Neill's committee is at present completing its deliberations on a review of the funding of political parties.
The review was launched after the Bernie Ecclestone affair last year, when Lord Neill told Labour it should return a pounds 1 million donation from the Formula One boss after he lobbied successfully for an exemption to a ban on tobacco sponsorship.Reuse content