Judith Collins is adamant she has done nothing wrong despite her sudden resignation today, but the dramatic move has left National's election campaign in crisis.
The former justice minister says email conversations suggesting she was undermining a former Serious Fraud Office boss are part of a prolonged smear campaign against her.
But John Key said he rang Ms Collins this morning for a discussion that ended with him accepting her resignation as a minister.
Ms Collins said it is very disappointing and she is looking forward to clearing her name.
"I will not let this disappointment define me," she said.
John Key said the seriousness of the allegations means her stepping down is the "honourable step" to take and "cumulatively this adds to the weight of issues about Ms Collins".
"She was the responsible minister, this is the head of the Serious Fraud Office and you know we all need to know completely what the facts are and in the end you need an inquiry," Mr Key said.
In the 2011 email blogger Cameron Slater says he spoke with Ms Collins and that she was gunning for the former director of the Serious Fraud Office, Adam Feeley and that Slater believed Feeley's position was untenable.
Ms Collins says Mr Feeley was an excellent chief executive and remained in the role until she was no longer the minister.
"I have been advised that the State Services Commissioner has looked at the file and seen nothing untoward," Ms Collins says.
Mr Slater insists he embellished the email and "gunning for Feely" were his words not hers.
But ONE News Political Editor Corin Dann says the reality is that Ms Collins had become a lightning rod of controversy for National in the wake of the Dirty Politics allegations against her in Nicky Hager's book and couldn't stay.
i think the nature of the email that i have released, indicates a very serious matter to me, i think the only would have been for the minsiter to resign.
Mr Key says the latest allegation requires a stronger response than previous scandals such as Oravida and her role in so-called dirty politics.
"I see this issue in isolation, when I've looked at the other issues I've always been happy to accept there is another side to often different stories, and she certainly has a different version of events, but the seriousness of this will not escape anybody," Mr Key said.
He said he has not struck any type of deal with Ms Collins. "If we're the government post September 20th, she won't be in Cabinet but that doesn't mean she can't be at some point in the future."
Ms Collins' resignation takes effect immediately and Christopher Finlayson will be Acting Minister of Justice, while Craig Foss will be Acting Minister for ACC and Hekia Parata will be Acting Minister for Ethnic Affairs.
A ONE News Colmar Brunton poll revealed yesterday 61% of respondents believed Ms Collins should resign. A total of 26% said no and 13% had no opinion.