Education Secretary Charles Clarke has been appointed as the new Home Secretary, the Prime Minister's office announced.
Sir Alan Budd, former civil servant appointed to investigate allegations that Blunkett intervened in the visa application of the nanny of his former lover, informed him that he had discovered an exchange of emails between his office and that of the Immigration Service.
In his resignation letter, Blunkett said: "Yesterday, Sir Aan Budd told me there had indeed been a fax and an exchange of emails between my office and the immigration and nationality directorate, not based on the application form as originally alleged but on the subsequent letter (informing her of a possible 12-month delay) of which I was always aware but did not remember holding a copy.
"I have no recollection of dealing with this in any way. I have always been honest about my recollection of events. But any perception of this application being speeded up requires me to take responsibility.
"That is why with enormous regret I have tendered my resignation to the Prime Minister today."
Prime Minister Blair wrote to Blunkett: "You leave government with your integrity intact and your achievements acknowledged by all. You are a force for good in British politics."
An emotional Blunkett told Sky News that the last weeks had been the worst of his life, as a dramatic break-up and paternity battle with former lover Kimberly Quinn finally forced him out from office.