Giles Chichester admitted a 'technical breach' of the rules
The leader of the Conservative Party's MEPs has quit that role after he admitted breaking expenses rules.
Giles Chichester paid thousands of pounds in staff allowances to a firm of which he is a paid director.
The South West England MEP said he had made a "technical" breach of the rules and had always acted "in good faith".
Meanwhile, another Tory MEP, Den Dover, has denied any wrong-doing in paying his wife and daughter a reported £750,000 for work over nine years.
Mr Chichester agreed to stand down as the Tory leader in Brussels after being asked to justify his actions by party leader David Cameron.
Mr Cameron said: "Giles Chichester is right to stand down as leader of our MEPs to prepare a full explanation of how his office is funded.
"Just as I expect our MPs to adhere to the highest standards, so must our MEPs.
"The tax-paying public have a right to know how their money is being spent and politicians have a duty to ensure it is spent properly."
Deputy leader Philip Bushill-Matthews will take over as acting leader.
Earlier this year, Mr Chichester drew up a new expenses code for Tory MEPs after being asked by Mr Cameron to get a grip on their allowances in the wake of the Derek Conway affair.
But Mr Chichester - son of round-the-world yachtsman Sir Francis - was forced to own up to what he called a "whoops-a-daisy" moment - apparently failing to spot a flaw in his own financial arrangements.
Giles Chichester has done for members of the European Parliament what Derek Conway did for MPs
A family firm - founded by his father to publish maps - has received £445,000 since 1996 from EU coffers "in connection with secretarial and assistant services for the European Parliament, constituency and committee work".
A contract for the arrangement was formally registered with the European Parliament, but a rule change all MEPs were notified of about five years ago prohibited channelling MEPs' expenses for their parliamentary staff through companies of which they are a member.
Mr Chichester says the rule change "had not been brought to my attention".
After press reports about his expenses, he said, he had clarified the situation with parliamentary officials this week and has now cancelled the contract.
European Parliament officials have confirmed he may have to pay some of the cash back.
Asked earlier for his view on the row, Prime Minister Gordon Brown said: "This is public money that has got to be explained for its use."
I am totally innocent of any charges
He said Labour MEPs had "insisted since 2000 on their being separate validated audits of their own expenses and they have a separate register about family employment".
In a statement, the Conservative Party said Mr Chichester stepped down after chairman Caroline Spelman asked him to provide a full explanation of the arrangements put in place to fund his staff by 1600 BST on Friday.
Mr Chichester chose to step down with immediate effect to prepare his report to the European Parliament authorities, said the party.
He will continue to be a Conservative MEP for South West England and Gibraltar.
Meanwhile a Conservative MEP for North West England, Den Dover, has told BBC News he had done nothing wrong in paying his wife and daughter a reported £758,000 through an outside company for secretarial and support services over nine years.
He said: "I am totally within the rules and regulations of the European Parliament. I put that in writing. I am not a director, have no shareholdings, have no payments from any outside company."
Asked if it looked "dodgy" to voters he replied: "It may do but I put it to you that there are an awful lot of MPs and MEPS who are employing their own family members."
He said his wife was fully qualified in book-keeping accountancy and his daughter as a secretary. "They get market rates but they put in two or three times the number of hours. They just never stop. Therefore I am totally innocent of any charges."
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