Mr Hain became the first casualty of Prime Minister Gordon Brown's term of office, stepping down as Work and Pensions Secretary and Secretary of State for Wales. His dramatic departure was announced minutes after the Electoral Commission said it had referred the row over his late declaration of £103,000 in funding to Scotland Yard.

The Metropolitan Police then confirmed an investigation had begun by detectives from its Economic and Specialist Crimes Command. Mr Hain was given advance warning of the commission's decision and telephoned the premier in Downing Street at 11.30am.

"It was not a protracted conversation," said Mr Brown's spokesman, who confirmed that Mr Hain instantly offered his resignation.

Parliamentary Standards Commissioner John Lyon later announced he had suspended a separate inquiry into complaints that Mr Hain failed to record donations in the Commons Register of Members' Interests, pending the outcome of the police inquiry.

James Purnell, 37, was promoted to Work and Pensions Secretary to fill the gap left by Mr Hain, and was himself replaced as Culture Secretary by another young "Blairite", 38-year-old Andy Burnham.

Yvette Cooper, 38, took Mr Burnham's old job of Chief Secretary to the Treasury, becoming, with husband Ed Balls, part of the first married couple ever to serve together in the Cabinet.

And Mr Hain's second job as Wales Secretary was filled by former Northern Ireland Secretary Paul Murphy, returning to the Government after a period on the backbenches as chairman of the parliamentary Intelligence and Security Committee.

Mr Murphy will also chair a new cross-departmental committee on the sensitive issue of IT and information security, in the wake of a series of losses of personal data by Government agencies.

The reshuffle also saw the resignations of long-serving Lords Chief Whip Lord Grocott and Lord Triesman, who leaves to become chairman of the Football Association. West Bromwich East MP Tom Watson - blamed by some for organising the 2006 backbench rebellion which forced Tony Blair to announce his plans to retire - won his first ministerial job, in the Cabinet Office.