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Her departure comes hot on the heels of the resignation of Home Secretary Jacqui Smith, who confirmed she will quit in the coming reshuffle, expected within the next few days.
Downing Street said Prime Minister Gordon Brown "respects and understands" her decision to quit the Cabinet and believes she made "an outstanding contribution to public life".
Ms Blears came under pressure after it was revealed she did not pay capital gains tax when selling a property on which she had claimed the parliamentary second homes allowance. She later repaid £13,000 to HM Revenue and Customs.
In a statement, Ms Blears urged voters to back Labour in the Euro-elections and said she wanted to "return to the grassroots where I began, to political activism, to the cut and thrust of political debate".
"Today I have told the Prime Minister that I am resigning from the Government. My politics has always been rooted in the belief that ordinary people are capable of extraordinary things, given the right support and encouragement."
She continued: "The role of a progressive Government should be to pass power to the people. I've never sought high office for the sake of it, or for what I can gain, but for what I can achieve for the people I represent and serve.
"In this next phase of my political life I am redoubling my efforts to speak up for the people of Salford as their Member of Parliament. I am returning to the grassroots (where I began), to political activism, to the cut and thrust of political debate.
"Most of all I want to help the Labour Party to reconnect with the British people, to remind them that our values are their values, that their hopes and dreams are ours too.
"I am glad to be going home to the people who matter the most to me: the people of Salford. Finally, there's an important set of elections tomorrow. My message is simple: get out and vote Labour."
Ms Blears's announcement piles yet more pressure on Mr Brown who is reeling after a day of resignations, fresh expenses revelations and dissent within the Labour Party.
Feverish speculation at Westminster is already turning to his fate after the impact of the results of Thursday's elections sink in among Labour ministers and backbenchers.
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