New Mexico Governor Bill Richardson has withdrawn as US President-elect Barack Obama’s nominee for commerce secretary.
Mr Richardson’s decision was linked to a pending investigation into a company which has done business with his state.
In a joint statement, Mr Obama said he had accepted Mr Richardson’s decision to withdraw “with deep regret”.
Mr Richardson denied any wrongdoing but said that the inquiry could take months and he could not allow the commerce department’s vital work to be delayed.
A federal grand jury in Albuquerque is investigating how a California company that contributed to Mr Richardson’s political activities won a New Mexico state contract.
The firm is not named in the joint statement issued by Mr Obama’s office, but the Associated Press and AFP news agencies have identified it as a company called CDR Financial Products.
The BBC’s Kim Ghattas in Washington says this is the first major hurdle Mr Obama has encountered as he puts together his new administration.
Mr Richardson said in his statement that, given the grave economic situation facing the nation, he could not hold up the important work Mr Obama’s government must do.
“Let me say unequivocally that I and my administration have acted properly in all matters and that the investigation will bear out that fact,” he said.
“But I have concluded that the ongoing investigation also would have forced an untenable delay in the confirmation process.”
He had asked for his name to be withdrawn with “great sorrow”, Mr Richardson said, adding that he would continue in his present role as governor.
Mr Obama described Mr Richardson as an “outstanding public servant and said his decision to withdraw his candidacy was “a measure of his willingness to put the nation first”.
Confirmation hearings for new cabinet members are due to start this week, ahead of Mr Obama’s swearing-in as president on 20 January.
While Mr Richardson could be cleared of any wrongdoing, the BBC cites its correspondent as adding, this is the second political corruption scandal to impact on the transition period.
In December, Illinois Governor Rod Blagojevich was charged with attempting to “sell” Mr Obama’s seat to the highest bidder. He denies any wrongdoing.
Mr Richardson, among the Democratic Party’s most prominent Hispanic politicians, becomes the first big-name figure to drop out of Mr Obama’s cabinet.
The governor stood against Mr Obama in the contest to be the Democratic presidential candidate last year but withdrew after performing badly in early state primary elections.
Under former President Bill Clinton, Mr Richardson served as US ambassador to the UN and as energy secretary.