“I will continue to support this Government and will continue to offer the Prime Minister all the support that I can. I am grateful for his decision to appoint me to the Cabinet and wish him and the Government all the best.

“And I want to thank too this department here and my Wales Office staff for all the support they have given me and ministerial colleagues that I have worked for. They have been a fantastic team. Thank you very much indeed,” he said.

After a "through review" of more than £103,000 belatedly declared to the Electoral Commission, the elections watchdog had handed the matter over to the police.

Downing Street said in a statement: “Peter Hain has made his statement. The Prime Minister has accepted Peter Hain’s resignation. There will be an exchange of letters in due course.”

Culture Secretary James Purnell is to take over Hain's position.

It is understood that Mr Hain phoned the Prime Minister at around 11.30am and informed him he had been told by the Electoral Commisssion of the police investigation.

Mr Hain is understood to have offered his resignation at that point without hesitation.

The resignation will come as a huge blow to Brown.

Police are already probing proxy donations to Labour of more than £600,000 from North East property developer David Abrahams, which Mr Brown has said were “unlawful” and not properly declared.

That case has already claimed the resignation of Labour’s general secretary, Peter Watts.

Shadow work and pensions secretary Chris Grayling said: “Peter Hain’s resignation was inevitable and the right thing to do given the Electoral Commission’s decision.

“What is important now is for Gordon Brown to take rapid action to restore effective leadership to a department that has clearly been distracted by the events of the last few weeks.”