TONY BLAIR was fighting to restore his authority last night after the dramatic Cabinet resignation of one of his closest allies.

And there was further trouble for the Prime Minister when the Government was forced to abandon proposals to hold terror suspects without charge for up to 90 days.

Mr Blair's day began badly when David Blunkett quit as Work and Pensions Secretary for breaching anti-sleaze rules over his business dealings.

He admitted to mistakes in failing to seek official advice before taking up private-sector jobs - worth up to £90,000 - within weeks of resigning for the first time last December.

But the spotlight fell immediately on the Prime Minister, who brought Mr Blunkett back to the Cabinet table after only five months, despite warnings about his tangled business and private life.

Mr Blair continued to insist yesterday that his close friend had been guilty only of an "honest misunderstanding" that had not warranted his dismissal.

In contrast, Lord Nolan - the "sleaze buster" whose committee introduced the rules in the 1990s - had insisted early in the day that Mr Blunkett should be sacked or demoted.

In the Commons, Tory leader Michael Howard said the Prime Minister's escalating troubles had seen the "slow seepage of his authority turn into a haemorrhage".

He taunted Mr Blair that he had lost "one of the last remaining allies in the Cabinet" and that the country was witnessing "the beginning of the final chapter of his administration".

Mr Howard added: "For how long will the country have to put up with this lame duck Prime Minister, in office but not in power?"

Mr Blair said Mr Blunkett left with "no stain of impropriety against him whatsoever". Most of the allegations against him, he said, were completely untrue.

Labour back-benchers sat silent and stony-faced while the Prime Minister defended his friend. In sharp contrast, there were broad grins on the Tory benches.

John Hutton, the Cabinet Office Minister, was named as Mr Blunkett's successor. Viewed as an ultra-Blairite, he is less likely to stand up to Number 10 in rows over cuts to incapacity benefits.

Earlier, at a hastily arranged news conference, Mr Blunkett did not reveal exactly what had persuaded him to quit after Mr Blair had backed him at an early-morning meeting. Amid farcical scenes, Mr Blunkett had been chased around part of the Houses of Parliament by journalists before being driven back to Downing Street to formally resign.

Mr Blunkett insisted it had been his, not Mr Blair's, decision that he should quit, because he wanted "to protect the Government from diversion".

Defending his actions, he said: "So I am guilty of a mistake and I am paying the price for it - and I make no bones about saying that it is my fault."

Mr Blunkett dropped a clear hint that his family would retain a £15,000 shareholding in the firm DNA Bioscience - thought to be worth up to £300,000 if the company floats on the stock market.

Only two days after pledging to sell the shares to avoid the perception of wrongdoing, he said it was now a decision for his sons, in whose name they were held.

Asked if his downfall was due to information gained from an illegal wiretap, Mr Blunkett replied mysteriously: "Who knows? On my walks in Derbyshire, I suspected that the birds in the trees were wired up."

Mr Blair is thought to have been incensed not to have been informed before yesterday's revelation that Mr Blunkett had broken the code over a third job, with an educational charity.

There will now be fierce Tory pressure on Mr Blunkett not to accept an £18,700 payment handed to ministers who resign, having received a similar sum only 11 months ago.

And he will be expected to give up his grace-and-favour homes in London's exclusive Belgravia, where he controversially continued to live after quitting as Home Secretary.

Meanwhile, last night a rebel Labour amendment to the Terrorism Bill, to limit detention to 28 days, was withdrawn only after Home Secretary Charles Clarke agreed to urgent discussions to reach a consensus.

Earlier, Mr Blair's majority was slashed to one on a separate amendment to allow prosecutions for glorifying terrorism only where there was clear intent.

The narrowest possible margin of victory increases pressure on the Government to compromise further before the Bill reaches its report stage in the Commons next Wednesday.