Blunkett quits on Blair's day from hell

After one of Mr Blair's darkest days since coming to power eight years ago, ministers fear the Prime Minister needs to convince his party he is in the driving seat. The past fortnight has been dominated by damaging cabinet splits over education and welfare reforms and smoking in public places.

Mr Blunkett's second resignation in 11 months and a growing mood of rebellion among Labour MPs is fuelling a sense of crisis over Mr Blair's premiership. At Westminster, there was an end-of-an-era atmosphere - even some allies were admitting the Prime Minister was in danger of being seen as a lame duck following his announcement that he would stand down before the next general election.

Mr Blair's attempt to remain in Downing Street until 2007 or 2008 could be in jeopardy unless he regains the initiative quickly. He will try to do that by pressing ahead with plans to reform health, incapacity benefit and pensions before Christmas.

The Prime Minister's judgement was widely called into question for recalling the loyalist Mr Blunkett to the Cabinet only five months after he resigned as Home Secretary last December in the aftermath of his affair with Kimberly Quinn.

"It was much too soon," one Blairite minister admitted.

Mr Blair was thrown on to the defensive during Prime Minister's Questions. Michael Howard, the Tory leader, told him he was "in office but not in power" and that this week marked "the beginning of the final chapter of his administration". He added: "The truth is that you've not only lost your allies but you've lost your authority. We have seen the slow seepage of your authority turn into a haemorrhage."

On a dramatic day, the Government's majority of 66 was slashed to just one when Mr Blair escaped a humiliating defeat over proposals to outlaw the "glorification" of terrorism. Voting was 300 to 299, with Mr Blunkett backing the Government.

It took a climbdown by Charles Clarke, the Home Secretary, to head off a possible defeat over the most controversial aspect of the Terrorism Bill - to allow police to hold suspected terrorists without charge for up to 90 days. Only a few hours after Mr Blair defended the plan, Mr Clarke was forced to promise all-party talks in an attempt to find a compromise by next week.

Although Downing Street insisted Mr Blunkett had not been sacked, it was clear Mr Blair played a part in his decision to resign when the two men held two meetings at No 10 yesterday morning. If he stayed on, Mr Blair faced a Commons mauling.

Mr Blair praised Mr Blunkett as "a decent and honourable man who has contributed a great deal to his country", and said he left office "with no stain of impropriety against him whatsoever".

It emerged last night that Mr Blunkettt had belatedly declared in the MPs' register of interests on Tuesday three speaking engagements worth up to £20,000 while he was out of office.

Mr Blair installed another loyalist, the Cabinet Office Minister, John Hutton, in Mr Blunkett's job as Work and Pensions Secretary. The Prime Minister has delayed the rest of his reshuffle, including Mr Hutton's successor at the Cabinet Office.

Mr Blunkett told a press conference: "I'm guilty of a mistake and I'm paying the price of it." He said he had resigned to protect the Government from further damage because his position had become untenable. "When you have been in politics as long as I have, you can smell and feel when it is time to step away," he said.

The 58-year-old MP admitted his cabinet career was over but said he wanted to continue playing a role in public life. He hinted that he might sue over recent newspaper claims about his relationship with an estate agent Sally Anderson but acknowledged that The Independent on Sunday was right to expose his breach of the ministerial code last weekend.

Last night, Ms Anderson claimed Mr Blunkett had continued dealing with the family that owns DNA Bioscience - the firm at the centre of his downfall, after he had returned to the Cabinet. She also contradicted his claims that they had had a platonic relationship.

Mr Blunkett has now said he may keep his family's £15,000 shares in DNA Bioscience, which he had announced his three eldest sons would sell.