Liam Fox quits as Defence Secretary

Liam Fox has resigned as Defence Secretary in the face of intense pressure over his links with his close friend, the lobbyist Adam Werritty.

In a letter to David Cameron, Dr Fox accepted that he had allowed the distinction between his personal interests and Government activities to become "blurred".

The Prime Minister moved swiftly to reorder his top team, moving right-winger Philip Hammond to take over at Defence and bringing Justine Greening into the Cabinet to replace Mr Hammond at Transport.

Dr Fox's decision to step down came amid reports that Mr Werritty's jet-set lifestyle following him around the world had been funded by a company bankrolled by wealthy right-wing backers of the Defence Secretary.

The prominent venture capitalist Jon Moulton said that he had been approached by Dr Fox following last year's general election to provide funds for Pargav, a not-for-profit company set up by Mr Werritty.

It was not clear whether it was the prospect the allegation that he sought funding for his friend's company could be about to surface that finally convinced Dr Fox he could no longer carry on in office.

In his resignation letter, Dr Fox said the consequences of his involvement with Mr Werritty "have become clearer in recent days". He added: "I have also repeatedly said that the national interest must always come before personal interest. I now have to hold myself to my own standard."

In his response, Mr Cameron paid tribute to the "superb job" which Dr Fox had done at the Ministry of Defence. "I understand your reasons for deciding to resign as Defence Secretary, although I am very sorry to see you go," he said.

Dr Fox telephoned the Prime Minister in his Oxfordshire constituency to inform him of his decision to quit. It is understood Mr Cameron had been prepared to let him carry on until an inquiry by the Cabinet Secretary Sir Gus O'Donnell was complete - despite the prospect of another weekend of damaging headlines - before reaching a decision.

Sir Gus had been charged by Mr Cameron with investigating whether Dr Fox's close links with Mr Werritty contravened the Ministerial Code of Conduct. The relationship between the two men has been under scrutiny since it emerged Mr Werritty had been distributing business cards describing himself as Dr Fox's adviser, even though he had no official role at the MoD or with the Tory Party.