He encountered a storm of criticism after he was photographed playing croquet at the Queen Anne country house near Burnham Beeches in Buckinghamshire last week when Tony Blair was in Washington.
The decision will be seen as a humiliating climbdown for Mr Prescott by critics in the Opposition and some on his own back benches, who led calls this week for him to resign.
They protested that he was allowed to keep his title, £133,000 salary and perks, but lost his Whitehall department in the reshuffle that followed the exposure of his affair with his diary secretary.
"MPs were using Dorneywood when they meant Blair or me. Dorneywood was a front partly to get at me, and to my mind to get at Tony Blair," Mr Prescott said. He took the decision as he headed for his home in Hull last night to celebrate his 68th birthday. He remains in charge of the Government while Mr Blair is on holiday until the weekend.
Mr Prescott said he had changed his mind in the last 24 hours after taking advice from family and close friends. He telephoned Tony Blair yesterday at the Prime Minister's holiday retreat in Italy and told him that he no longer wanted to be the official tenant of the house, which is made available to ministers under a charitable trust.
"I have begun to see that Dorneywood has become the issue and it's preventing me getting on with my job," he said.
Mr Blair asked him at that time to leave the residence but Mr Prescott refused, saying it was a place of relaxation for himself and his wife, Pauline. "I felt I could get some rest there. The Daily Mail sent photographers to Majorca where I was on holiday last year and I had to cancel my holiday after two days because I was completely surrounded.
"I went to Dorneywood and that was a great place of relaxation but it's now clear that you can't walk round anywhere without some photographer being paid a lot of money taking a photograph of you walking on the lawn or whatever it might be. It's got in the way of my job. It's become a political issue and I am not prepared to allow that to interfere in the work I have to do."
Mr Prescott said last night: "Like other cabinet ministers before me, I have used Dorneywood as a place to stay, relax and to work. I am well aware that my use of it now is a subject of public controversy and criticism and a matter of concern amongst some MPs in the Labour Party."
He stressed that the Dorneywood house was owned by a charitable trust at no cost to the taxpayer. Making it clear again that he would not resign his post, Mr Prescott said he would continue to focus on his job, which the Prime Minister had given him, chairing cabinet committees to deliver manifesto promises.
There is a danger that his critics will now attack Mr Prescott for staying in a palatial apartment in Whitehall above Admiralty House overlooking St James's Park, despite having no Whitehall office. Unlike Dorneywood, the grace and favour apartment costs the taxpayer £102,000 a year.
Vince Cable, the Liberal Democrat Treasury spokesman, said Mr Prescott should be forced to quit because he was a laughing stock. "He is not regarded by his boss and his colleagues as being able to hold down an Whitehall department yet he is in charge of the country when the Prime Minister isn't there. We should harp on less about the perks and concentrate more on what his role really is," said Mr Cable.
Margaret Beckett had a flat below Mr Prescott but is moving out after becoming Foreign Secretary, which entitled her to take over Chevening in Kent from Jack Straw, whom she replaced at the Foreign Office.
The former leader of the House, Geoff Hoon, demoted to a post outside the Cabinet in the last reshuffle, is also moving out of his flat in Admiralty House. Dorneywood could now go to another cabinet minister, such as Jack Straw, the former foreign secretary, or John Reid, the Home Secretary.
It originally went to Mr Prescott because Gordon Brown, the Chancellor, turned it down. If it is not taken over by another cabinet colleague, it would then go to the Lord Mayor of London not the elected Mayor, Ken Livingston and finally would be offered to the American ambassador, whom Mr Livingstone has called a "chiselling little crook".
Dorneywood's residents include Kenneth Clarke, the former Tory chancellor, who presented the croquet set to the house.
History of Dorneywood
Built in 1920, Dorneywood is a 21-bedroom, Queen Anne-style house near Burnham in Buckinghamshire. It was gifted to the National Trust in 1943 by Lord Courtauld-Thomson as a country home for a senior member of government. The Prime Minister decides which minister or secretary of state will occupy the house, with its own butler, housekeeper and chef, set in 214 acres.
John Prescott, the subject of The Mail on Sunday pictures, below, has used the house - more often the residence of the Chancellor - since Gordon Brown decided he had no interest in it. It was occupied by Anthony Eden, before becoming Prime Minister. Eden and his wife disliked the house, but Alec Douglas-Home was reluctant to leave for Chequers.
John Major used Dorneywood before becoming Prime Minister in 1990. The house, where Mr Prescott spends many weekends, is maintained by the Dorneywood Trust charity.
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