Work and Pensions Secretary Andrew Smith has resigned from the Cabinet.
Smith saw Mr Blair on Monday
There had been newspaper speculation he was to be dropped from the Cabinet in a forthcoming reshuffle.
But Downing Street insisted the move had come as a surprise to Prime Minister Tony Blair, who tried to persuade him to stay.
Mr Smith said he wanted to leave his post "to devote more time to the responsibilities I enjoy in my constituency and to my family".
Downing Street did not say when Mr Smith's successor would be named.
However, BBC chief political correspondent Mark Mardell said ex-health secretary Alan Milburn would "definitely" return to government, possibly preparing policies for the next election manifesto.
BBC political editor Andrew Marr said friends of Mr Smith had suggested he had been swayed with some of Mr Blair's advisers about the extent of a possible crackdown on disability payments.
Mr Smith, 53, entered the Cabinet in 1999 and took the work and pensions job in 2002. He is seen as an ally of Chancellor Gordon Brown.
His department was also set to bear the brunt of civil service job cuts and the interim findings of a government-commissioned review of pensions policy is due next month.
In his resignation letter, he said: "Over the summer, I have discussed with my
family the contribution I wish to make in public life.
"I have chosen to leave the government and to devote more time to the
responsibilities I enjoy in my constituency and to my family."
He thanked Mr Blair for asking him to stay on, but added: "I have, though, come to this decision after careful thought and my mind is settled."
In his letter of reply, Mr Blair said he was sorry to lose "an excellent colleague and a first-class minister who will be greatly missed".
"As you say in your letter, I very much wanted you to stay, but I accept that
your mind is made up," he said.
The prime minister will be questioned about the resignation, and his impending reshuffle, when he holds his monthly news conference on Tuesday, when Parliament also returns from its summer break.
Trade Secretary Patricia Hewitt has been linked in newspaper reports to the work and pensions job.
But Mr Blair could promote younger, more junior ministers such as Schools Minister David Miliband or Treasury Minister Ruth Kelly.
Labour's former Chief Whip Nick Brown, another ally of the chancellor, said Mr Smith's exit weakened the government.
He complained ministers were being briefed against from inside government.
"If the idea is to divide the Labour Party - and particularly the
Parliamentary Labour Party - between the 'ins' and the 'outs', then I think
that's a pretty poor way to run the show," he told Channel 4 News.
Conservative shadow pensions secretary David Willetts said he could understand why Mr Smith has decided to go after being briefed against, but "he just didn't ever get to grips with the scale of the pensions crisis that we face."
Liberal Democrat work and pensions spokesman Steve Webb said the new secretary of state had several major tasks.
"Andrew Smith's period in office will be remembered as one when the crises in company pensions
grew unchecked, where mass means-testing was the order of the day and the
pensions system became more complicated than ever," he said.