Dr Jack Cunningham: "He's resigning to save the government embarrassment"

Mr Mandelson wrote to Prime Minister Tony Blair, saying: "I should not, with all candour, have entered into the arrangement.

"I should, having done so, have told you and other colleagues whose advice I value and I should have told my permanent secretary on learning of the inquiry into Geoffrey Robinson, although I entirely stood aside from this."

Political editor Robin Oakley: Astonishing bombshell

It emerged on Monday evening that Mr Mandelson had failed to declare the loan given to him by his Cabinet millionaire colleague Mr Robinson when the pair were still in opposition.

Mr Mandelson used the loan to buy a house in London's fashionable Notting Hill two years ago.

Loan was used to buy house in exclusive Notting Hill Gate

The row gained impetus because the trade secretary's department is now investigating alleged irregularities in Mr Robinson's business dealings.

Mr Robinson is expected to resign when he makes a statement on the affair later on Wednesday.

It is understood Mr Mandelson made the decision to quit after a telephone conversation with the prime minister.

Conservative leader William Hague insisted the prime minister should have fired Mr Mandelson and ought to do the same with Mr Robinson.

"It these people were on my frontbench I would have sacked them," he said.

The low-interest loan had been kept secret from the prime minister and key officials for two years until last week.

Mr Hague had previously written to Mr Blair, saying Mr Mandelson was clearly in breach of the parliamentary rules on conflict of interest.

On Tuesday, Mr Mandelson repeatedly stated he had done nothing wrong and there was no conflict of interest.

Geoffrey Robinson: Business affairs under investigation

But Shadow Trade Secretary John Redwood demanded details of Mr Mandelson's �150,000 mortgage application to the Britannia Building Society after the trade secretary told newspapers he could not recall whether he had informed it he was also getting help from Mr Robinson to buy the house.

The Financial Times says the Britannia requires details of other loans on the security of a property.

The paper said Mr Mandelson issued a statement saying he could not "recall details of an application form filled in two years ago" although he was sure "he would have sought to answer the question properly".

Some Labour MPs had also questioned Mr Mandelson's conduct.

Mr Mandelson is the fourth minister in Mr Blair's government to resign - after Malcolm Chisholm, Ron Davies and Frank Field.

The former-minister is one of the architects of new Labour and a close personal friend of Mr Blair.

He is known as the party's arch spin doctor, boosted by his spell as the minister without portfolio before his promotion to the DTI in the summer reshuffle.