In a letter to David Cameron, Fox accepted that he had allowed the distinction between his personal interests and government activities to become “blurred”.
The prime minister moved to re-order his top team, moving right-winger Philip Hammond to take over at defence and bringing Justine Greening into the cabinet to replace Hammond at Transport.
Dr Fox’s decision came amid reports that Werritty’s jet-set lifestyle following him around the world had been funded by a company bankrolled by wealthy right-wing backers of the defence secretary.
The venture capitalist Jon Moulton said last night that he had been approached by Fox following last year’s general election to provide funds for Pargav, a company set up by Werritty.
It was not clear whether it was the prospect the allegation that he sought funding for his friend’s company could be about to surface that convinced Fox he could no longer carry on in office.
In his resignation, Fox said the consequences of his involvement with Werritty “have become clearer in recent days”.
“I have also repeatedly said that the national interest must always come before personal interest. I now have to hold myself to my own standard,” he added.
In his response, Cameron paid tribute to the “superb job” which Fox had done at the ministry of defence.
“I understand your reasons for deciding to resign as defence secretary, although I am very sorry to see you go,” he said.
Fox telephoned the prime minister in his Oxfordshire constituency to inform him of his decision.
It is understood that Cameron had been prepared to let him carry on until an inquiry by cabinet secretary Gus O’Donnell was complete — despite the prospect of a weekend of damaging headlines — before reaching a decision.
Fox received support from Tory backbenchers when he appeared in the Commons on Monday and, despite a difficult relationship in the past, Cameron appeared reluctant to wield the axe unless it was clear he had to go.
There are concerns among supporters of the prime minister that, out of government, Fox could become a rallying point for the Tory right.
O’Donnell had been charged by Cameron with investigating whether Fox’s close links with Werritty contravened the Ministerial Code of Conduct.
The relationship between the two men has been under scrutiny since it emerged that Werritty had been distributing business cards describing himself as Fox’s adviser, even though he had no role at the MoD or with the Tory party.
Earlier this week, an interim report by MoD permanent secretary Ursula Brennan disclosed that Werritty had met Fox 22 times at the MoD and joined him on 18 overseas trips since he came to office last year.
They included talks with the Israeli ambassador, a dinner with the new US commander of international forces in Afghanistan, and a meeting with a defence supplier in Dubai at which no officials were present.
The disclosures led to questions as to how he was given such high-level access, even though he had no security clearance. Questions have also been raised as to how he funded his travel.