Mr Glover, a Doncaster councillor for 15 years, had pledged to restore the council's reputation among its citizens. On Wednesday, Mr Glover was arrested at his home and interviewed by detectives investigating the allegations.
Announcing Mr Glover's resignation as leader and from the Labour Group, the Labour Party said that Mr Glover was strongly contesting the allegations against him, "which are not current but go back some years".
However, Mr Glover's arrest is an embarrassment for the Labour Party as he had been given the personal seal of approval by Tony Blair who told Doncaster residents Mr Glover's leadership presented a brighter future.
The Conservative local government spokesman, Richard Ottaway MP said: "What on earth has happened to Doncaster's brighter future? This man was brought in to clean up Doncaster's politics - what's gone wrong?"
Andrew Sharp, the Party's director for the region said: "As Leader, Malcolm Glover has played an important role in bringing a wide range of changes during a difficult period for Doncaster Council. He has informed me that he is standing down as Leader and from the Labour Group while he contests any allegations."
Mr Glover's lawyer, Mr Daniel Stowell, said Mr Glover had been arrested and taken to Wombwell Police Station near Barnsley. "He assisted the police with their inquiries and was released on bail without charges, pending further inquiries."
The South Yorkshire Police said in a statement, "A Doncaster man has been arrested and released on bail in connection with ongoing inquiry into Doncaster Council."
Mr Glover, 47, a former British Rail store keeper, became a councillor in 1982 and is a member of the Balby ward where he lives with his wife and two children. Councillor Glover had served on most of the Council's major committees.
According to the Yorkshire Post, Mr Glover was closely associated with Doncaster council's secretive mining group caucus which formed "a party within a party"."During the 1980s and early 1990s, he appeared to have successfully distanced himself from those tainted by the unfolding scandal," the paper said.
Before last May's local council elections, Mr Glover apologised to voters for the Donnygate affair.
The scandal erupted after allegations surfaced of councillors enjoying free drinks at the racecourse, overseas trips on club-class flights, over use of council credit cards and official cars used to ferry councillors round the City's pubs.
So far, 20 people have been arrested including Mr Glover, and four serving or former members of Doncaster Council have been prosecuted since police launched "Operation Danum" in April 1997.Reuse content