Tom Daschle said he did not want to distract from Mr Obama's agenda
Former Senator Tom Daschle has withdrawn his nomination as US health and human services secretary after a controversy involving unpaid taxes.
US President Barack Obama said he had accepted his nominee's withdrawal "with sadness and regret".
Mr Obama later acknowledged in a TV interview that he had "made a mistake" in his handling of the case.
It emerged last week that Mr Daschle, an early Obama backer, had failed to pay some $130,000 (£90,000) in taxes.
His move came only hours after Nancy Killefer, nominated as budget watchdog, also withdrew over tax issues.
The two high-profile withdrawals were the latest setbacks for Mr Obama as he seeks to form his new administration.
Ms Killefer said she did not want a personal tax issue - reportedly concerning household help - to distract from and delay Mr Obama's plans.
Tom Daschle says he notified officials when he realised he had made a mistake.
Her appointment to the newly-created post of chief performance officer was intended to help cut wasteful government spending.
Announcing his withdrawal, Mr Daschle, the former Senate Democratic leader, said he would not have been able to operate "with the full faith of Congress and the American people".
He also said he did not want to "be a distraction" from Mr Obama's agenda.
In a statement, Mr Obama said: "Tom has made a mistake, which he has openly acknowledged. He has not excused it, nor do I."
The president went on: "Now we must move forward with our plan to lift this economy and put people back to work."
'Setting an example'
In an interview with NBC Mr Obama said he regretted the way he had handled the case.
"I've got to own up to my mistake which is that ultimately it's important for this administration to send a message that there aren't two sets of rules," he said, according to a transcript.
"You know, one for prominent people and one for ordinary folks who have to pay their taxes."
Nancy Killefer was nominated to a newly-created budget watchdog post
White House press secretary Robert Gibbs said both nominees had come to the decision to withdraw on their own.
"They both recognised that you can't set an example of responsibility but accept a different standard of who serves," Mr Gibbs said.
Massachusetts Senator John Kerry said Mr Daschle's withdrawal was a great loss to the cause of health care reform.
"When the smoke clears and the frenzy has ended, no-one will believe that this unwitting mistake should have erased 30 years of selfless public service and remarkable skill and legislative expertise on health care," he said.
Mr Daschle paid about $128,000 in back taxes and $12,000 in interest last month.
Appearing before the Senate Finance Committee on Monday, he apologised for what he said had been a mistake. The tax issue stemmed from the use of a car and driver provided to him by a friend and consulting client.
The BBC's James Coomarasamy in Washington says Mr Obama has been facing growing criticism over the contradiction between his pledge to create a new, ethical administration and the problems of his nominees.
US Treasury Secretary Timothy Geithner was confirmed last week only after long arguments over his failure to pay $34,000 (£24,500) in taxes he owed until shortly before he was nominated.
In January, New Mexico Governor Bill Richardson announced he was withdrawing from consideration as commerce secretary after an investigation was launched into a state contract that had been given to his campaign donors.
Republican Senator Judd Gregg was on Tuesday nominated instead, the second from his party to be asked to join Mr Obama's cabinet.
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