Constitutional Affairs minister Harriet Harman has given up parts of her role which involve overseeing election laws and House of Lords reform.
Harman: Married to Jack Dromey
Ms Harman is married to Jack Dromey, Labour's treasurer, who said on Wednesday he was "kept in the dark" over recent loans made to the party.
These loans were at the heart of "cash for peerages" claims - which have been rejected by Downing Street.
Ms Harman is said to have asked for the move to avoid any conflict of interest.
Her role overseeing House of Lords reform looked at whether peers should be nominated or elected in the future.
A spokesman for the Department for Constitutional Affairs said: "Ms Harman was the one who asked to be relieved of the responsibility for electoral administration."
It is understood Ms Harman raised the matter with her boss, the Lord Chancellor Lord Falconer, and it was agreed she should concentrate on other areas of her brief including the courts and legal aid.
Prime Minister Tony Blair told his monthly press conference that No 10 had had nothing to do with Ms Harman's decision.
Mr Blair said he wanted the honours system to be reformed, the rules on loans to political parties changed and stressed the party had broken no rules.
In addition the government would bring forward plans shortly for the last stage of House of Lords reform, he said.
Earlier Home Secretary Charles Clarke denied any rift over funding between Downing Street and Labour Party officials following the revelations about secret loans.
Mr Clarke said it was reasonable for an internal inquiry to take place, but denied "cash for peerages" claims.
Those claims followed the revelation that three people who had given the loans - on commercial terms - had subsequently been nominated for peerages.
The public administration committee has announced it is to summon the three Labour Party donors to appear before the committee. They are also to ask Blair adviser and fundraiser Lord Levy to appear before them.
The rules on party funding mean that anyone donating money over £5,000 has to be named - but loans of any amount do not have to be declared.
Mr Dromey said he did not know the party had secretly borrowed millions of pounds last year and has launched an internal Labour inquiry which will report next week.
He said on Wednesday No 10 must have known before him about the loans, adding: "It's wrong that Downing Street thinks it can run the Labour Party: we are an elected party, a democratic party."
'Farce to funny business'
Colleagues of Mr Dromey have categorically denied to BBC News that he is seeking to damage the prime minister by going public with his concerns over party funding.
"People around the prime minister spend too much time talking to themselves. They think there is some sort of high political game going on here. There isn't," a source told BBC News.
Conservative constitutional affairs spokesman Oliver Heald: "I welcome the news that the minister is to no longer continue with her responsibilities for electoral matters.
"Obviously this is a sensible decision and avoids any conflict of interest."
Liberal Democrat constitutional affairs spokesman Simon Hughes: "Jack Dromey's revelation about Labour's finances shows the loans story is moving from farce to funny business or worse.
"Even New Labour's left hand doesn't know what its left hand is doing. Significant loans must be declared because they potentially give the lender much more influence over a party than ordinary donations."
Earlier Labour MP Kelvin Hopkins, a commons public administration committee member, echoed Mr Dromey's call for an Electoral Commission investigation.