Scotland Office minister David Cairns has resigned from the government, Downing Street has confirmed.
The Inverclyde MP, is the first minister to resign since rebel MPs began calling for a leadership contest.
Earlier Labour's ruling National Executive Committee rejected calls for nomination papers to be sent out to MPs ahead of next week's conference.
Two MPs have already lost government jobs and a third resigned after saying Gordon Brown should face a challenge.
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Whip sacked
Mr Cairns, a former Catholic priest who was elected to Parliament in 2001, became a minister at the Scotland Office in 2007.
He used to be a researcher for Siobhain McDonagh, the first member of the government to be sacked in the row.
The former assistant whip broke ranks last Friday to call for a challenge to the prime minister.
A party vice-chairman, Joan Ryan, was then sacked for the same reason and Barry Gardiner, who had been the PM's special envoy on forestry, left the job "by mutual consent" after backing the calls and saying people had stopped listening to Mr Brown.
Mr Cairns, who played a prominent role in the Glasgow East by-election which Labour lost to the SNP and was close to Scottish Secretary Des Browne, who, the BBC understands, had tried to talk him out of resigning.
There have been rumours that other, more junior ministers are also considering resigning in the coming days.
'Ostriches'
Labour MP Stephen Pound said Mr Cairns had been "extremely close" to Ms McDonagh so his resignation had been "suspected for a while". He told the BBC Mr Brown would be "frustrated" at another distraction from his job as PM, of guiding Britain through difficult times.
"Gordon Brown knows what has to come first, the country has to come first and if the party comes second then frankly, so be it," he added.
Former Home Office minister Fiona MacTaggart, another of the rebels, told the BBC earlier that the cabinet should now realise "how serious the position is".
"Previously I'm afraid that they were behaving somewhat like ostriches with their heads in the sand, hoping things would get better and turn up. That is not now possible."
But several senior Labour figures have warned their colleagues that a leadership contest could be damaging.
They said voters expected the government to be concentrating on the issues affecting the country - like the turbulence in the financial markets following the collapse of US investment bank Lehman brothers.
Cabinet ministers such as Alan Johnson and Harriet Harman rallied round Mr Brown on Tuesday and urged unity in the party.
Former foreign secretary Margaret Beckett told the BBC earlier: "We're not talking about 'shall we have the luxury of wondering whether this leader or that leader would suit us better', this is the man in charge in very difficult times and nobody better, in my view."
And Labour's ruling National Executive Committee also backed the party's general secretary's refusal to send out leadership nomination papers to all Labour MPs ahead of next week's conference.
In a statement issued after the NEC meeting, chair Dianne Hayter said, while in government, a leadership election would only be held if it was requested by a majority of the party conference on a card vote.
She added: "Only Labour MPs can trigger the process and the NEC is confident that most MPs know their responsibilities under the rules."
(BBC)
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