Question of judgment: Blair left bloodied as Blunkett is driven from office again

• Former minister resigns over failing to declare business interests

• Three contracts worth 20,000 uncovered on the eve of his resignation

• PM's Commons majority cut to one on terrorism bill

Key quote"I am guilty of a mistake and I am paying the price for it. I step down today to protect the government" - David Blunkett

Story in full TONY Blair hit the lowest point of his premiership yesterday, losing David Blunkett from his Cabinet and his ability to push his agenda through in the House of Commons.

The wounded Prime Minister last night fought to stem his draining authority by promoting John Hutton, a staunch loyalist, to replace Mr Blunkett as Work and Pensions Secretary.

But rather than rally around Mr Blair, many Labour MPs were openly questioning his judgment in recalling Mr Blunkett to the government in May following his resignation as home secretary last December.

Those doubts helped fuel the most damaging rebellion Mr Blair has ever endured. Debating the controversial terrorism bill, Labour MPs reduced his once-impregnable Commons majority to a single vote.

And in an unprecedented capitulation to the Labour rank-and-file, ministers last night were forced to postpone by a week a key vote on detaining suspects without charge after party managers warned Mr Blair he would otherwise face his first direct Commons defeat.

The Commons revolt came after Mr Blair had seen one of his most trusted ministers - a man he had defended to the last - driven from office over his business affairs.

"I am guilty of a mistake and I am paying the price for it," said Mr Blunkett. "I step down today to protect the government."

Mr Blunkett's resignation - the second time in 11 months he has had to quit the Cabinet - came after he admitted that he had broken ministerial rules over three separate private sector jobs he took earlier this year before his return to the government in May.

As recently as two days ago he had insisted he would not quit, and had Mr Blair's full backing. But last night, it emerged that there were three more commercial contracts - worth up to 20,000 - which he had failed to declare to the parliamentary authorities until Tuesday night.

It seems likely, therefore, that Mr Blunkett quit yesterday morning before those payments became public and completely undermined his position.

Mr Blunkett will receive an 18,750 severance payment, and it was unclear last night if Mr Blair will continue to allow him the use of a grace-and-favour government house in London.

In the Commons, Michael Howard - now in his final month as Tory leader - launched a savagely effective attack on Mr Blair.

"We have seen the slow seepage of his authority turn into a haemorrhage," he said. "Doesn't the Prime Minister see that this week marks the start of the final chapter in his administration?"

Mr Blair, his voice distorted by a cold, insisted that Mr Blunkett had in fact done nothing wrong and left office without a stain on his character. "He is a decent and honourable man who has contributed a great deal to his country," Mr Blair said.

But behind him, the ranks of Labour MPs were visibly unconvinced. Privately, some were last night questioning how much longer Mr Blair can put off the fulfilment of his own promise to quit before the next election.

"The wheels have come off, the gearbox has dropped out, it's all gone wrong - Tony is in trouble," said one Labour MP. A former Labour minister said the day was a "bloody disaster for him".

The ink on Mr Blunkett's resignation letter was barely dry as he was pressed into service voting in the Commons to help save the government from its first direct parliamentary defeat.

At issue was the terrorism bill, which would outlaw the "glorification of terrorism" and allow the police to hold suspects without charge for up to 90 days.

The bill has aroused intense unease among Labour backbenchers and several yesterday tabled amendments intended to water down its measures.

One of those amendments, by the veteran Labour rebel Bob Marshall-Andrews, attracted enough support to cut the government's normal Commons majority of 66 to one.

In all, 31 Labour MPs voted against the government to endorse the amendment, which would create much stricter criteria on glorification offences.

In a telling sign, Katy Clark, the newly-elected MP for Ayrshire North and Arran, chose to vote with the rebels, clearly not concerned about trying to curry favour with a prime minister whose authority is waning.

The near-defeat convinced Labour whips they could not win the tougher vote on extending police detention powers.

In a significant climb-down due to the "strong reservations" of Labour MPs, Charles Clarke, the Home Secretary, last night agreed to shelve the vote and seek "consensus".

Third pensions minister this year has a big job ahead

OPPOSITION parties and industry experts yesterday lamented the appointment of the third work and pensions secretary in six months.

John Hutton was last night beginning one of the most daunting jobs in Tony Blair's government, an important post that brings with it some of the most far-reaching decisions set to be made this parliament.

The first challenge for Mr Hutton, 50, a former law lecturer, is welfare reform. The government is poised to publish a green paper aimed at cutting the 2.7 million-strong list of people claiming incapacity benefit, 319,000 of them in Scotland.

Mr Blair wants a "get tough" approach, cutting benefits to encourage claimants to work, a proposal that horrifies many Labour MPs.

Also, on 30 November, the Pensions Commission will outline its proposals to tackle what some call a pensions crisis.

Over 12 million people are currently saving too little to provide for a decent retirement and the possible remedies are all controversial, with compulsory savings and a higher retirement age high on the agenda.

"John Hutton has got a lot of work to do in a very short period of time," said David Laws, of the Liberal Democrats.

"The risk is that this instability at the top of government will delay much-needed reform."

JAMES KIRKUP