Mr Simitis said he could no longer work at the beck and call of a small ruling clique. His resignation came 24 hours after the Prime Minister publicly attacked him for botching the privatisation of the Skaramanga naval shipyard which was supposed to have been sold to a consortium of Japanese, Norwegian, Singaporean and Israeli companies.
In a resignation letter, Mr Simitis refused to take responsibility for the mess, saying he had followed government policy to the letter but had found himself hampered by a separate decision-making process within "the circles of power" - a clear reference to Mr Papandreou's personal entourage.
Mr Simitis, who has been a key figure in Socialist governments since 1981, had been at odds with Mr Papandreou over privatisation, and the shipyards in particular, for several months. Political point-scoring within the ruling party has all but paralysed Greece's efforts to comply with European Union agreements and sell off some of its less efficient assets.
The main issue is political. With Mr Papandreou's days as party leader numbered - he is 74, losing popularity and in indifferent health - the race is on for his succession and Mr Simitis is a prime contender.