Peter Hartz, Volkswagen's head of human resources, yesterday offered to resign from Europe's biggest carmaker, in a setback for his close ally, German chancellor Gerhard Schröder.

Mr Hartz, who was the author of the government's controversial labour market reforms, is the most prominent victim of a bribery and fraud scandal at the company, which has shed light on the unusually close relationship between management, unions and politics at VW.

It has also raised questions about the involvement of workers in strategic decision-making and spurred debate on labour market reform.

VW's supervisory board has still to decide whether to accept the resignation of Mr Hartz - who has described allegations that he gave a blank cheque to workers to spend the company's money on luxury holidays and prostitutes as "absurd".

However, Mr Hartz's departure appears likely, and the shares closed up 2.3 per cent on the news.

Bernd Pischetsrieder, chief executive, said he respected Mr Hartz's decision, which he took "to prevent damaging the company". Mr Hartz's resignation is both a personal and a political blow for Mr Schröder, who is facing a probable election defeat in September.

Their relationship dates back to when Mr Schröder, as former state premier of Lower Saxony, was a supervisory board member of VW. The VW executive headed the commission that produced Hartz IV, the most radical economic reform of Mr Schröder's seven-year tenure.

His successor as state premier, Christian Wulff of the opposition Christian Democrats, is known to be hostile to Mr Hartz - who is a member of the ruling Social Democratic party.

The scandal has already cost the job of Klaus Volkert, the powerful former head of the works council who has denied any wrongdoing, as well as two other VW workers who worked closely with Mr Hartz.