Immigration Minister Beverley Hughes has resigned from her job.
Her departure comes amid claims that the Home Office approved visa claims which were backed by forged documents.
Tony Blair's official spokesman said Ms Hughes had quit after it became clear she had given a "misleading impression - albeit unwittingly" to Parliament.
The Conservatives have been calling on her to quit for days but Mr Blair and Home Secretary David Blunkett have until now insisted she is staying on.
The prime minister, who is giving his monthly news conference at 1200 BST on Thursday, will now have to start a government reshuffle.
Ms Hughes herself is due to give a statement in the House of Commons at 1230 BST.
Tory leader Michael Howard on Wednesday branded the immigration system a "shambles" and demanded an independent inquiry into claims of a "scam" over business visa applications from Romania and Bulgaria.
But Mr Blair urged people not to prejudge the internal inquiry which is now under way, although he did not specifically defend his ministers.
The latest allegations broke when James Cameron, a consul in the British Embassy in Bucharest, e-mailed the Conservatives with his concerns about the European Community Association Agreement (ECAA).
The Tories have released documents showing the Home Office was warned about forgery worries 18 months ago over the migration scheme for prospective business people.
Those allegations followed the claims made by another whistleblower, Steve Moxon, early last month.
He revealed that immigration officials in Sheffield were told to waive checks on applications for the ECAA scheme.
An internal inquiry concluded that local officials were trying to clear backlogs and ministers did not know about their decisions.
In a Commons debate on Tuesday Ms Hughes rejected calls for her to quit, saying her conscience was clear.
She said: "I am neither incompetent nor dishonest and I intend to carry on doing my job as long as the prime minister and the home secretary want me to."
At that stage, Downing Street said Mr Blair "absolutely" still had confidence in her.
And Mr Blunkett told MPs: "Let me absolutely clear: Beverley Hughes is not going, she's not resigning, she's not going to be sacked."
Professor Bernard Crick, who gives advice to the Home Office, said he was "absolutely heartbroken" that Ms Hughes was leaving.
"She is one of the straightest and most intelligent ministers I have met in public life," he told BBC News 24.
But Sir Andrew Green, from Migration Watch UK, said Ms Hughes had been forced out because the immigration system was in "chaos".
It seems that she has resigned early under pressure from Blair, but she made the crucial mistake of saying something to the House that turned out not to be true. We can only hope that David Blunkett is implicated in it, too.