Ms Smith was the most high profile among a clutch of resignations to hit the Prime Minister today, including two further members of his administration.
The moves created a momentum that threatens to de-rail his planned relaunch in the wake of what are expected to be abysmal polling results for Labour in the council and MEP elections on Thursday.
Children's Minister Beverley Hughes announced she wanted to leave in the shake-up - for family reasons - and Cabinet Office Minister Tom Watson is also expected to step down.
Labour backbencher David Chaytor confirmed he would retire at the next election to contest claims he reaped almost £13,000 in taxpayers' cash on a mortgage that did not exist.
And ex-Cabinet minister Patricia Hewitt, relatively untouched by the expenses furore, said she was not seeking re-election, to concentrate on charity work in India.
Sources close to the Home Secretary said Ms Smith was so hurt by revelations in March - including the humiliation of repaying £10 her husband Richard Timney, who works as her assistant, claimed for watching two adult films - that she told Mr Brown just days later that she wanted to quit.
One source said: "She's been hurt by what's gone on and it's been a difficult couple of months for her."
Another source close to the Home Secretary said she wrote to the Prime Minister at Easter in the wake of disclosures about her expenses to inform him she did not wish to continue in Government.
As well as the outrage over her claim for adult films, Ms Smith was criticised for claiming her main residence was a rented room in the property she shared with her sister.
That allowed her to claim second home allowance on the family home in Redditch, Worcestershire.
It is understood Ms Smith's decision was influenced not just by the expenses claims but also driven by a desire to spend more time with her family.
Her children, aged 10 and 15, live with Mr Timney during the week while Ms Smith is in Westminster.
The source defended Ms Smith's claims compared to later revelations, and said the family "went through" the expenses scandal before the wider story broke, meaning they faced the media attention on their own.
The Home Secretary did not mention her decision as she opened a debate in the Commons this afternoon, but looked on with barely disguised fury as shadow home secretary Chris Grayling paid tribute to her as Britain's first female home secretary at what he described as her "final appearance at the despatch box".
Labour Backbencher Mr Chaytor, MP for Bury North, said he made the decision to leave Parliament at the next general election after weekend talks with senior party officials and his constituency party.
He had already been suspended from the Parliamentary Labour Party and faced the humiliation of being de-selected as a candidate after a forthcoming "star chamber" inquiry.
Announcing his decision to go, Mr Chaytor said that, for the coming months, his "priority must be to explain my errors following allegations over the use of parliamentary allowances".
"This will be time-consuming and stressful," he went on, adding that he would not have time for constituency campaigning.
He is to repay nearly £13,000 he claimed by continuing to submit £1,175 monthly bills for mortgage interest months after the loan was paid off.
Another Cabinet reshuffle casualty could be Chancellor Alistair Darling, whose career is hanging by a thread after he was forced to apologise for, and pay back, hundreds of pounds he wrongly claimed on his taxpayer-funded expenses.
Today he even had to revise the amount he repaid after quoting the wrong figure.
After telling broadcasters last night that he was repaying £350, an aide said today the true sum was nearly double that, at £668.
Transport Secretary Geoff Hoon was also under pressure after being forced to issue an apology and pay back money after admitting he had "accidentally" overclaimed £384.
Ms Hughes increased the sense of disarray in Westminster by releasing a statement disclosing she had told the Prime Minister she wanted to leave the Government in his next reshuffle, which she said could be "very soon".
Ms Hughes will also be leaving Parliament at the next election, as will Ms Hewitt, MP for Leicester West. Both cited family reasons and denied their decisions were related to the expenses scandal.
But they were the latest of 15 MPs who have lined up to hand in their resignation notices since the furore erupted almost four weeks ago.
Another Labour backbencher, Jim Devine, was facing de-selection today after being referred to the party's star chamber over allegations that he submitted receipts from a firm that may not have existed.
Gordon Brown, struggling to contain the expenses row, is to start chairing a new National Democratic Renewal Council, made up of ministers, from next week.
But his proposals to help rebuild the public's trust in parliament were again drowned out by the expenses row.
Asked today for his views about Mr Darling and Mr Hoon, Mr Brown's spokesman said: "He thinks they are both doing very good jobs."
Mr Darling, on a visit to Swindon, brushed aside questions about the Government's future, saying: "We want to make sure we support our economy, that we help the people of this country, that we also have the right constitutional framework so people feel confident they can have a say and that when they want things done, they can get them done.
"That's what we are concentrating on. Whether it's today or weeks ahead, that's what this Government is totally focused on."
But feverish speculation at Westminster is already turning to the fate of Mr Brown after the impact of the results of this Thursday's elections sink in among Labour ministers and backbenchers.
And tonight, the SNP and Plaid Cymru announced they would use an opposition day debate next Wednesday to urge the Prime Minister to request the dissolution of parliament and hold a general election.
