Andy Coulson has resigned as Downing Street director of communications today, saying the row over phone-hacking when he was editor of the News of the World was distracting from his job.
Critics who have questioned British prime minister David Cameron's judgment in appointing
Mr Coulson as his communications chief said they felt vindicated.
Mr Coulson resigned as editor of Sunday tabloid newspaper News of the World in 2007 after one of his reporters was jailed for secretly listening to phone messages of royal household staff.
The newspaper is owned by Rupert Murdoch's News Corp, which is waiting to hear if the government will clear its planned $12 billion buyout of pay TV operator BSkyB or refer the deal to competition authorities for further checks.
"Continued coverage of events connected to my old job at the News of the World has made it difficult for me to give the 110 per cent needed in this role," said Mr Coulson, who has always denied any knowledge of wrongdoing at the newspaper.
"When the spokesman needs a spokesman it's time to move on," he said in a statement.
Mr Cameron has repeatedly defended Mr Coulson, one of his inner circle, and today defended his own judgment in hiring him after his resignation from the News of the World.
"I feel that he's been punished twice for the same offence. I chose to judge him by the work that he's done for me, for the government and for the country," Mr Cameron said.
Opposition leader Ed Miliband said his Labour Party had been proved right to question Mr Coulson's position.
"Labour has been saying for some months that there are real questions about Andy Coulson's ability to do his job given the cloud of allegations hanging over him," Mr Miliband said.
The government is pushing through harsh spending cuts to tackle a record budget deficit. Mr Coulson was seen as having the common touch needed to help deliver the austerity message of a government that includes many wealthy individuals.
But it seems unlikely his departure will do major damage unless he is sucked further into phone-hacking investigations.
Police said last month there was not enough evidence to charge Mr Coulson with any crime.
However, the story resurfaced this month when the News of the World suspended senior editor Ian Edmondson, named in a lawsuit by film star Sienna Miller, who accuses the paper of breaking into her voicemail account to hear her messages.
Mr Coulson's exit severs a link between the government and News Corp, amid criticism that culture secretary Jeremy Hunt is too close to Mr Murdoch to judge whether the company should be allowed to buy BSkyB.
Mr Hunt is in charge of deciding whether to refer the proposed deal to Britain's Competition Commission, which could delay any deal by six months and push up the likely price.
London brokerage Numis today raised its price target on BSkyB shares to 825 pence from 800 pence to reflect a rise in the FTSE stock index since News Corp made its approach last June. Numis expects the deal to be delayed by further regulatory investigation, pushing the share price higher.
News Corp wants to buy the 61 per cent of BSkyB it does not already own for 700 pence per share, or 7.8 billion pounds ($12.4 billion). BSkyB shares traded at 748.5 pence at 1422 GMT.
There are concerns the sale would harm media plurality in Britain, where News Corp already owns the mass-selling Sun and News of the World tabloids and the Times of London.
News Corp's British newspapers supported Mr Cameron during last year's national parliamentary elections.
Reuters/PA