Cameron praises Laws as 'good and honourable man'

Mr Cameron suggested the politician might return to government "in time" and his deputy, Nick Clegg, said the Yeovil MP's downfall had been caused purely by his desire for privacy, which had now been "cruelly shattered".

Mr Laws became the first casualty of the new coalition Government, quitting after just 17 days' service. It emerged he had claimed more than 40,000 of taxpayers' money to pay in rent to his boyfriend, whom he had kept secret as he had not wanted to reveal he was gay.

Announcing his departure the Liberal Democrat, who had been charged with cutting Britain's 156bn Budget deficit, said: "I do not see how I can carry out my crucial work on the Budget and spending review while I have to deal with the private and public implications of recent revelations."

The loss of Mr Laws is a major setback for the Tory-Liberal Democrat coalition. He was a pivotal figure in negotiations between the parties after the inconclusive General Election result and has since impressed Tories with the vigorous way he set about implementing spending curbs.

Mr Laws has been replaced by Danny Alexander, whose former role of Scottish Secretary has been taken by Liberal Democrat colleague Michael Moore.

In his resignation letter, Mr Laws wrote: "While my recent problems were caused by my desire to keep my sexuality secret, the public is entitled to expect politicians to act with a sense of responsibility.

"I cannot now escape the conclusion that what I have done was in some way wrong, even though I did not gain any financial benefit from keeping my relationship secret in this way."

Responding to the resignation letter, Mr Cameron wrote: "You are a good and honourable man. I am sure that, throughout, you have been motivated by wanting to protect your privacy rather than anything else. Your decision to resign from the Government demonstrates the importance you attach to your integrity.

"In your short time at the Treasury, you have made a real difference, setting the Government on the right path to tackle the deficit which poses such a risk to our economy."

Mr Clegg added: "There are clearly questions that David Laws himself acknowledges must now be answered about his own expenses, and he did the right thing referring himself to the Parliamentary Commissioner for Standards.

"When these questions have been addressed, I very much hope that there will be an opportunity for him to rejoin the Government."

The announcement came after a newspaper expose, which led to Mr Laws dramatically admitting he was gay and referring himself to the Parliamentary standards commissioner.

According to the newspaper, Mr Laws claimed up to 950 a month over a period of five years to rent a room in south London from his secret long-term partner, lobbyist James Lundie.

Since 2006, Parliamentary rules have banned MPs from "leasing accommodation from a partner".