Gordon Brown was forced into the first unwanted and damaging cabinet reshuffle of his six months as prime minister last night after Peter Hain resigned his post as he faced the prospect of being questioned under caution by police investigating more than £100,000 of undeclared donations.
In what will be the third police investigation into Labour and political funding, the work and pensions minister could be prosecuted under the Political Parties, Elections and Referendums Act 2000. Under the law anyone convicted of a corrupt or illegal act could face a fine or one year's imprisonment.
Hain was left with no choice but to tender his resignation after the Electoral Commission took the dramatic step of referring to Scotland Yard the failure to disclose 17 donations to his deputy leadership campaign. Hain, 57, who was also secretary of state for Wales, had a legal duty under the act to inform the commission of his donations.
He said he was leaving the government to dedicate himself full time to clearing his name. He was given only two hours' notice that the commission was going to issue a statement, but was not told what it said. Later, he rang Brown, and both rapidly agreed he had to resign.
One of the most independent minded figures in a sometimes grey cabinet, Hain had been hoping, as had Brown, that the commission would simply reprimand him for a serious administrative oversight.
But sources at the commission said unanswered questions about the degree of Hain's knowledge about the money meant the police needed to be called in.
There was anger within Labour circles over the commission's tough stance. One source pointed out that the independent body had issued a one line press release when David Cameron, the Conservative leader, was forced to repay £7,000 of foreign donations.
But the commission, which has no powers to impose any punishment, believed it could not simply issue a reprimand given the scale of the non-disclosure.
Shortly after he quit, Hain said: "I severely and seriously regret the mistake in declaring the donations late."
In a letter to Brown he added: "I made a mistake but it was an innocent mistake."
Members of the Hain campaign team have already hired lawyers to prepare themselves for what may be a lengthy police inquiry.
Amid signs of continuing falling-out within the campaign over responsibility for the debts, and responsibility for the failure to report donations, some members of Hain's staff were advised not to talk to one another in case they could be accused of colluding, or even preparing to pervert the course of justice.
The Metropolitan police confirmed an investigation had begun by detectives from its Economic and Specialist Crimes Command led by Acting Commander Nigel Mawer, who is already leading an inquiry over allegedly disguised donations to Labour.
The police are expected to focus on the use of a little known thinktank to channel £50,000 donations, the role of a campaign organiser, Steve Morgan, and responsibility within the campaign for declaring donations.
The prime minister moved quickly to implement a wider than necessary reshuffle, promoting young ministers rather than drafting in former cabinet heavyweights, such as the former home secretary Charles Clarke. The culture secretary, and a former pensions minister, James Purnell, 37, was promoted to work and pensions secretary. Andy Burnham, 38, previously Treasury chief secretary, was appointed culture secretary. He is replaced at the Treasury by the housing minister, Yvette Cooper, 38.
Paul Murphy, an experienced old hand, was asked to return to the Wales Office.
Brown will be furious that his efforts to offer a clean break after the 18 month cash-for-peerages inquiry has ended with the first criminal inquiry into a cabinet minister he appointed. He will also be hoping that the deputy leader, Harriet Harman, will not face a police investigation over her receipt of a £5,000 donation to her campaign.
Cameron accused Brown of failing to show leadership earlier. "It's the right decision, but it shouldn't have happened in this way," he said of the resignation.