Defenceless: Fox finally resigns

Liam Fox bowed to overwhelming pressure last night and resigned as Defence Secretary over ties with his close friend and self-styled adviser Adam Werritty.

He finally gave up his fight to hold on to his post and became the first Conservative to leave David Cameron's Cabinet, admitting in a resignation letter that he had allowed the distinction between his personal life and his Government post to become "blurred".

Mr Fox's resignation came after 10 days of torrid headlines about Mr Werritty's business links and his privileged access to the Defence Secretary.

Mr Fox had tried to ride out the storm but yesterday afternoon concluded he could not hang on any longer. He telephoned Mr Cameron to say he should resign. Last night Mr Fox cleared his desk in the Ministry of Defence (MoD) and said goodbye to officials. Mr Cameron was swift to replace him with Philip Hammond, who was previously the Transport Secretary and is seen as a safe pair of hands who will continue to drive through Mr Fox's cost-cutting reforms at the MoD. Mr Hammond was succeeded at the Department for Transport by Justine Greening, the Economic Secretary at the Treasury, who becomes the fifth woman in the Cabinet. She was replaced at the Treasury by Chloe Smith, whose place in the government whips office went to Greg Hands, parliamentary aide to George Osborne.

Mr Fox, seen as the standard-bearer of the Tory right, was braced for another raft of allegations in tomorrow's newspapers. He told friends he had decided to step down because he could see no end to the media feeding frenzy.

Other Whitehall sources said the final blow came yesterday when reports suggested that Mr Werritty's lavish lifestyle and globetrotting at Mr Fox's side were funded by rich business figures with interests in defence companies who also shared his political agenda as an avowed neo-Conservative, pro-American Eurosceptic.

Last night there were claims that, while he was Defence Secretary, Mr Fox solicited a donation for Pargav, a not-for-profit company financing Mr Werritty's activities – the most damaging allegation to date.

Jon Moulton, a venture capitalist who contributed £35,000 of Pargav's £147,000 income, said: "After the [2010] election I was asked by Dr Fox to provide funds to a non-profit group called Pargav involved in security policy analysis and research and after obtaining written assurances as to its activities I provided personal funding to Pargav. Neither I, nor any of my associates, sought or received a benefit of any form from Pargav."

Tory MPs, who staged a show of support for Mr Fox in the Commons on Monday, warned yesterday that support for him was beginning to drain away. "It was clear the tide was turning," one senior Tory said.

The Prime Minister was prepared to tough out the storm – at least until Sir Gus O'Donnell, the Cabinet Secretary, delivered his inquiry report on Mr Werritty's role and whether Mr Fox had broken the ministerial code. Mr Werritty was interviewed for a second time yesterday.

One friend of Mr Fox told The Independent: "The strategy at the start of the week was to starve this story of oxygen. It seemed to be a good strategy but it did not work, because there were a lot of people feeding the story. It was clear it was not going away."

In his letter to the Prime Minister, Mr Fox admitted: "I mistakenly allowed the distinction between my personal interest and my Government activities to become blurred. The consequences of this have become clearer."

Right-wing allies expressed the hope that Mr Fox would be able to return to the Government.