Malcolm Glover had been elected leader in March last year, supported by senior Labour Party leaders anxious to clean up a council shaken by allegations of corruption.
Mr Glover, 47, a Doncaster councillor for 15 years, had pledged to restore the council's reputation among its citizens. On Wednesday, he was arrested at his home and interviewed by detectives investigating the allegations.
In announcing Mr Glover's resignation as leader and from the Labour group, the Labour Party said he was strongly contesting the allegations against him, "which are not current but go back some years".
However, his 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 Labour 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 possible allegations."
Mr Glover's lawyer, Daniel Stowell, said his client had been 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 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.
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 last year.Reuse content