The former Trade and Industry Secretary underlines that he does not believe he has done anything wrong.

But he apologises for "the situation" and says he is proud of the role he has played in the Labour Party.

It reads: "Dear Tony, I can scarcely believe I am writing this letter to you.

"As well as being one of my closest friends you are a close colleague whose leadership and political qualities I value beyond all others.

Peter Mandelson: "Scarcely believe I am writing this"

"As you have, I have reflected overnight on the situation concerning the loan I took from Geoffrey Robinson and I have decided to resign from the Government.

"As I said publicly yesterday, I do not believe that I have done anything wrong or improper. But I should not, with all candour, have entered into the arrangement.

"I should, having done so, told you and other colleagues whose advice I value.

"And I should have told my Permanent Secretary on learning of the inquiry into Geoffrey Robinson, although I had entirely stood aside from this.

"I am sorry about this situation. But we came to power promising to uphold the highest possible standards in public life. We have not just to do so, but we must be seen to do so.

"Therefore with huge regret I wish to resign. I am very proud of the role I played in helping you and previous leaders of the Labour Party to make our party electable and to win our historic victory last May.

"I am proud of the trust you placed in me both at the Cabinet office and at the DTI.

"In just 18 months you have helped to transform this country and the Government has made huge progress delivering on our manifesto and its programme of modernisation.

"I will always be a loyal Labour man and I am not prepared to see the party and the Government suffer the kind of attack this issue has provoked.

Tony Blair: Paid tribute to Mr Mandelson

"You can be assured, of course, of my continuing friendship and total loyalty. Yours ever, Peter."

In his letter accepting Mr Mandelson's resignation, Mr Blair paid tribute to his colleague's work for government and for the Labour Party.

He wrote: "Dear Peter, You will know better than anyone the feelings with which I write to you.

"You and I have been personal friends and the closest of political colleagues.

"It is no exaggeration to say that without your support and advice we would never have built New labour.

"It was typical of you, when we spoke last night, that your thought was for the reputation of the Labour Party and the Government and that you believed that since there had been a misjudgment on your part, then, as you said to me 'we can't be like the last lot' and that what we are trying to achieve for the country is more important than any individual.