Hain quits as police investigation threatens Brown's fightback

Gordon Brown's fightback stalled yesterday as the Metropolitan Police began a second investigation into Labour funding, forcing the resignation of Peter Hain from the Cabinet. The Prime Minister now faces the prospect of two searching inquiries Scotland Yard, which could drag on throughout this year.

Police are already looking into £600,000 of secret donations to Labour by the property developer David Abrahams. That follows the 13-month police inquiry into "cash for honours" which cast a shadow over the Blair government even though no charges were brought.

Yesterday, Mr Hain bowed to the inevitable by resigning his two posts as Work and Pensions secretary and Welsh secretary when the Electoral Commission referred his failure to register £103,000 of donations to his Labour deputy leadership campaign on time to the police.

Mr Brown sought to regain the initiative by carrying out a swift reshuffle in which he promoted rising Blairite stars to give his Government a fresher look. But the first resignation of a Cabinet minister since he became Prime Minister was a setback in his attempt to put the disastrous last three months of 2007 behind him.

Mr Hain telephoned Mr Brown at 11.30am yesterday to tell him that he had decided to quit. His type-written resignation letter appears to have been drafted before yesterday, when he filled in the precise date by hand. Mr Brown made no attempt to change his minister's mind.

The Tories claimed that the Prime Minister's refusal to sack Mr Hain as soon as he disclosed the huge £103,000 figure showed indecision and a lack of judgement. Mr Brown described the fiasco in the Hain campaign as "an incompetence" last week but his aides said that he had not wanted to prejudge the commission's investigation.

Mr Hain said he had no alternative but to resign "in order to give myself the time and opportunity to clear my name". He added: "I severely and seriously regret the mistake in declaring the donations late."

The Prime Minister praised his many years of public service, telling him in a letter: "I know you will continue to make a contribution to public life."

Labour's problems over what the Tories call its "dodgy donations" could get worse. The commission is looking into donations made to Harriet Harman, the House of Commons leader, and Wendy Alexander, Labour's leader in Scotland. The allegations involve £5,000 and £950 respectively. The huge scale of Mr Hain's late donations may have tipped the balance against him in the eyes of the commission. It has been criticised as a watchdog without teeth but faced a dilemma over the Hain case as it could not impose a penalty and had only two options – a rap on the knuckles, which would have been seen as a whitewash, or calling in the police.

It decided on the latter.

John Lyon, Parliament's anti-sleaze watchdog, has suspended his inquiry into Mr Hain's entries in the MPs' register of interests now that the police have become involved. Paul Flynn, a Labour MP, said that Mr Hain was a victim of a "nasty, vindictive witch-hunt" and there was no evidence of sleaze.

But opposition parties were less sympathetic. David Cameron, the Tory leader, said: "It's the right decision... [but] the Prime Minister should have said to Peter Hain, 'you've got to give a convincing explanation of your situation or you can't stay in the Cabinet,' instead we've had a long delay where one of the most important departments in government hasn't been led properly."

David Davis, the shadow Home Secretary, said the key questions that needed answering were what Mr Hain knew and the status of the Progressive Policies Forum think-tank, through which half of the donations were channelled. Chris Grayling, the Conservatives' work and pensions spokesman, said: "Peter Hain's resignation was inevitable and the right thing to do given the Electoral Commission's decision. What is important now is for Gordon Brown to take rapid action to restore effective leadership to a department that has clearly been distracted." Danny Alexander, the work and pensions spokesman for the Liberal Democrats, said that the transition from Blair to Brown felt "increasingly like the transition from Thatcher to Major".

View from the constituency

In his own words he has resigned to "clear his name", but yesterday the name of Peter Hain was as good as ever in his constituency of Neath in south Wales. The news that he had quit as Work and Pensions Secretary and Secretary of State for Wales shocked constituents, but most of them were still fully behind him despite the controversy over the donations to his deputy leadership campaign.

In Neath yesterday, most of those on the streets spoke of their sorrow at his downfall. They told of a good man who had done much for their small town and for Wales.

Ivor Jenkins, 80, said: "I thought that in this country you were innocent until proven guilty. That doesn't seem to be how Mr Hain has been dealt with. He is still an innocent man and there was no reason he had to resign. I'm glad he is still the MP for the area, he's done a lot for this area and for Wales and I hope he clears his name and gets back into the Cabinet."

Andrew Baden Walters, 25, added: "Peter Hain is an absolutely cracking bloke and it's disgusting he has had to resign. He has been punished for a mistake that wasn't even his, but a member of his staff's. He has been excellent for Neath and for Wales and Northern Ireland too. The only silver lining we have is that at least he is still our MP."

But there were dissenting voices. Alan Aimer, 65, said: "It's about time he fell on his sword and I hope he resigns as the MP for Neath too. There's no smoke without fire. You'll get a lot of people round here telling you how great he is, but there are two reasons that people here think that: because he can speak Welsh and because he's quite a good-looking bloke. "As a man he is a slippery customer and the Cabinet is well shot of him. Neath would be too."

Mark Hughes