The Mandelson Affair: Black Christmas for Blair as Mandelson and Robinson quit

TONY BLAIR was reeling last night from his worst crisis since becoming Prime Minister after the resignations of Peter Mandelson and Geoffrey Robinson, two of his senior ministers.

Mr Mandelson, one of Mr Blair's closest friends and allies, stunned the political world by quitting as Secretary of State for Trade and Industry over the pounds 373,000 personal loan he took from the millionaire Mr Robinson to help him to buy a pounds 475,000 house in Notting Hill, west London, in 1996.

Three hours later Mr Robinson resigned as Paymaster- General. He had already decided to stand down after Christmas because of a string of disclosures about his business affairs before he became a Treasury minister. But he brought forward his announcement as Mr Mandelson became engulfed in controversy over the loan.

The loss of Mr Mandelson is a devastating setback to the Prime Minister, as he is one of the principal architects of New Labour. Cabinet ministers fear Mr Blair's image will be tarnished and he will badly miss Mr Mandelson's advice on political strategy. Mr Blair was told by Mr Mandelson he felt wretched and angry with himself.

Mr Mandelson hopes he has limited the damage by resigning 48 hours after details of the loan emerged. But ministers fear further revelations about Mr Robinson's financial links with Gordon Brown, the Chancellor.

Mr Robinson is believed to have funded Mr Brown's Commons office in the run-up to last year's general election, and the Tories will table questions on their relationship when Parliament returns next month, as they step up attacks on "cronyism" at the heart of the Government.

Mr Blair made clear that he hoped Mr Mandelson would return to his government one day, telling him in a letter that he believed that, in the future, "you will achieve much more with us".

One option would be for Mr Mandelson to run Labour's campaign at the general election, but he is thought unlikely to win back a cabinet post until he has won re-election in his Hartlepool constituency.

Mr Blair told Mr Mandelson: "It is no exaggeration to say that, without your support and advice, we would never have built New Labour."

The Prime Minister sought to stabilise his government last night by appointing two of Mr Mandelson's fellow modernisers to cabinet posts. The new Trade and Industry Secretary is Stephen Byers, already in the Cabinet as Chief Secretary to the Treasury. That post goes to Alan Milburn, the Health minister.

Mr Byers and Mr Milburn are seen as the "Blair and Brown" of their generation. They both entered the Commons in 1992 and, like the Prime Minister and Chancellor eight years earlier, shared an office at Westminster.

An emotional Mr Mandelson, who said he loved his job at the Department of Trade and Industry, insisted last night that he had not broken the law or the rules on the conduct of ministers. But he admitted to "a lapse of judgement" in taking the loan and not telling DTI officials about it on entering the Cabinet in July, when "alarm bells" should have rung.

He said: "The price I have paid is a high price, but it has been a necessary one to restore people's confidence in government and politics as a whole and also my own integrity.

"Through my own misjudgement I have allowed the impression to be created of wrongdoing and I am not going to allow that charge to be laid against a government that I care about more than anything else in the world." Mr Mandelson said people would have "different views" about his arrangement with Mr Robinson. Some would say he was entitled to take a loan from a friend; others would think "this is a whopping great loan and he's living beyond his means".

In a further statement last night, Mr Mandelson admitted that his application form to the Britannia Building Society for a pounds 150,000 mortgage for the balance of the purchase price on the house "may not reflect the final financing arrangements" for the property. He said he could not locate a copy of the form but would be writing to the society to clarify the position.

Mr Robinson said he had been subjected to "persistent and unfair" allegations about his business affairs, which "had come to a point which was not acceptable anymore". However, Downing Street suggested that he, too, should have told his civil servants about the loan.

Downing Street said there would be no inquiry into the leaking of the Robinson loan to Mr Mandelson, despite speculation that it was linked to the feud between him and Mr Brown.

Peter Lilley, the deputy Tory leader, called for an independent inquiry to reassure the public that no other ministers had undisclosed links with Mr Robinson. "Public confidence in the Government's integrity has been sorely undermined," he said.

Paddy Ashdown, the Liberal Democrat leader, said Mr Mandelson made an honourable decision. His exit is a setback to Mr Ashdown, as he was one of the strongest supporters of closer Labour-Liberal Democrat links.

John Prescott, the Deputy Prime Minister, admitted there were "tensions" between the Brown and Mandelson camps but he refused to be drawn on reports that Alastair Campbell, the Prime Minister's press secretary, had demanded the sacking of Charlie Whelan, the Chancellor's press aide.

There were also reports last night that some senior ministers were becoming increasingly critical of Mr Whelan, who has denied being the source of the leak about the loan.