Charlie Whelan, one of the Chancellor's closest aides, announced he is to leave his job as the Treasury's press secretary despite strongly denying he leaked details of Mr Mandelson's pounds 373,000 personal loan from Geoffrey Robinson, the former paymaster-general.
Downing Street denied that Mr Whelan had been forced out. But Mr Brown and Mr Blair are understood to have discussed his future by telephone last week during the Prime Minister's holiday in the Seychelles.
It is believed they agreed that Mr Whelan would have to quit to enable the Government to draw a line under the Mandelson affair and prevent further damaging speculation about tension between the Prime Minister and his Chancellor.
Government insiders suggested Mr Whelan decided to jump before he was pushed. As The Independent revealed on Saturday, several cabinet ministers were calling for his head, with some threatening to raise the issue in Cabinet next week.
Alastair Campbell, Mr Blair's press secretary, is believed to have told the Prime Minister he would no longer work with Mr Whelan after Mr Mandelson's sudden departure just before Christmas.
Mr Whelan said the level of media speculation about his role in the affair was making it impossible to carry out his job effectively. "I do take the view that the job of press secretary becomes extremely difficult if the press secretary, and not the department he serves, becomes the story and the subject of excessive attention," he said.
"It is absurd that, on the day the euro starts trading, in the week the Monetary Policy Committee is meeting and when the Chancellor is working on a number of important initiatives for the new year, that there is such attention focused on me."
Mr Whelan said he would stand down as soon as he found another job, which is expected to be in the private sector.
The Tories said he was a "lame duck" and should stand down immediately, but called on him to serve a period of "quarantine" before taking a private-sector job because he knows the secrets of Mr Brown's March Budget.
Although Downing Street insisted there was no evidence that Mr Whelan leaked details of Mr Mandelson's loan, and paid tribute to his work, it revealed that Mr Campbell would have to approve his successor at the Treasury.
Cabinet ministers hope that Mr Whelan's announcement will allow the Government to "get back to the basics" of concentrating on policy.
"Now is the time to draw a line under recent events," said David Blunkett, the Secretary of State for Education and Employment. "The key political issue is not the obsession with so-called spin-doctors and camps but the Government's united determination to keep the promises we made to the electorate."
Mr Blair, still on holiday in the Seychelles last night, tried to bring to an end the most unhappy period since he won power by completing the ministerial reshuffle caused by the resignations of Mr Mandelson and Mr Robinson.
The Prime Minister underlined his desire to cement his close relationship with the Chancellor by allowing him to promote Dawn Primarolo, a junior Treasury minister, to Paymaster-General.
Michael Wills, a close ally of Mr Brown on the Labour back benches, was promoted to the post of junior minister at the Department of Trade and Industry. The changes were seen at Westminster as a sign that Mr Blair wants his axis with Mr Brown to be the Government's pivotal relationship.
The developments follow Mr Brown's decision to form an alliance with John Prescott, the Deputy Prime Minister, aimed at reasserting traditional Labour values after Mr Mandelson's resignation.
David Heathcoat-Amory, the Tories' chief Treasury spokesman, said: "The real problem is not one out-of-control spin- doctor but ministers who are so obsessed with their own fiefdoms and doing down their colleagues that the business of government - and the interests of Britain - are suffering."
As speculation grew about Mr Whelan's successor, one front-runner was Kevin Maguire, political editor of The Mirror and the journalist who is closest to Mr Whelan and the Chancellor. Another was David-John Collins, press secretary to Ken Jackson, leader of the AEEU union. Mr Collins is relatively young at 27, but has made his mark quickly at the engineering and electrical union where Mr Whelan cut his teeth as a press officer.
Two Weeks of Turmoil
Peter Mandelson resigns as Secretary of State for Trade and Industry after it is revealed that he accepted a pounds 373,000 loan from the Paymaster- General, Geoffrey Robinson. In his resignation letter, Mr Mandelson says: "I should not, with all candour, have entered into the arrangement."
Geoffrey Robinson quits on the same day, saying in his resignation letter that after12 months of "a highly charged political campaign" against him he had
reached the point where it was right for him to go.
Tony Blair retreats over planned appointment of Geoff Hoon, Blairite Minister in the Lord Chancellor's Department, as Paymaster-General after meeting resistance from Gordon Brown at another No 10 "spy" in the Treasury.
The Deputy Prime Minister, John Prescott, seeks to revive Old Labour values when he tells The Independent that the Government was "a massive deliverer, particularly when we have decided that public expenditure is there to uphold the economy in the traditional Keynesian way".Reuse content