TONY BLAIR was struggling to retain his political authority last night after suffering the blows of David Blunkett’s resignation and the slashing of his Commons majority to 1 in a vote on the new terror laws.

Mr Blunkett walked into the wilderness after resigning from the Cabinet for the second time in a year.

Mr Blair lost a battle to keep him after both men were told that support for Mr Blunkett among Labour MPs had collapsed. The Work and Pensions Secretary also realised that his attempts to draw a line under the row about his business dealings had failed and was likely to go on dogging Mr Blair and the Government.

But even as Downing Street announced yesterday afternoon that Mr Blunkett was being replaced by John Hutton, Labour MPs inflicted further wounds on Mr Blair as 33 of them opposed the Prime Minister over his proposals for an offence of glorifying terrorism. It was the nearest that Mr Blair had come to defeat since winning the 1997 election and a warning of the perils that lie ahead now that his Commons majority has been cut to 68.

Michael Howard taunted Mr Blair in the Commons an hour after Mr Blunkett’s resignation, calling the Prime Minister a lame duck and saying that during the past week the slow seepage of his authority had “turned into a haemorrhage”. He repeated Norman Lamont’s gibe against John Major after his resignation in 1993, saying said that Mr Blair was “in office but not in power”.

Labour MPs criticised Mr Blair’s judgment in bringing back Mr Blunkett to the Cabinet in May, only six months after his resignation as Home Secretary, and then in trying to hold on to him this week when all looked lost.

The Times understands that Mr Blair and Mr Blunkett were told by Hilary Armstrong, the Government Chief Whip, that a big majority of MPs believed that Mr Blunkett’s position was “unsustainable.” While few MPs were exercised about breaches of the ministerial code, they were upset by his decision to join the DNA Bioscience company in the middle of the election campaign and to buy a block of shares in the company.

Mr Blunkett, 58, gave as his reason for going his threefold breach of the rule that former ministers should consult the Advisory Committee on Business Appointments about jobs they intend to take on leaving office. But he said that it was because he could “smell and feel it was time to step away” from office because of the damage that he was inflicting on the Government.

Friends said that he had already received a stream of questions from the Sunday newspapers about his business affairs and realised that there could be no swift escape.

Although aides denied that Mr Blunkett was going because of any so far undisclosed “smoking guns”, they admitted that he had only recently declared in the Commons register of interests three speaking engagements for which he was paid a total of up to £20,000. The new register will be published towards the end of this month.

Mr Blunkett called Downing Street at 8am yesterday to arrange a meeting with Mr Blair. It happened just after 9.15am and Mr Blunkett told him he was going. Mr Blair told Mr Blunkett that his mistakes over the code were not a sufficiently serious reason for him to resign, a position he later elaborated on in the Commons, saying: “I could discover no impropriety or wrongdoing.”

Mr Blair asked Mr Blunkett to consider his move and to be certain of what he intended to do, but the Prime Minister does not appear to have made a serious attempt to talk him out of his decision. Mr Blunkett went to the Commons and, after talking with friends, decided that he had no choice but to go. He went back to see Mr Blair and the resignation ritual was set in motion.

The Prime Minister now faces a difficult two months up to Christmas with many Labour MPs in revolt over his education plans and Mr Hutton having to take over the poisoned chalice of welfare reform from Mr Blunkett. Mr Blair’s choice of such an enthusiastic moderniser is a sign that he is determined to force through radical changes to incapacity benefit.

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