Iain Duncan Smith's authority as Tory leader was dealt a humiliating blow last night when Barry Legg, his choice as party chief executive and chief of staff, was forced to resign.

Mr Legg, a right-wing former MP and close friend of Mr Duncan Smith, was ousted after complaints by the party's ruling board that he was not suitable for such senior jobs. The Tory leader's move was designed to head off even greater embarrassment next Monday when the board was expected to block Mr Legg's formal appointment.

Mr Legg sat on the scandal-hit Westminster council of Shirley Porter, authorised the housing of homeless people in asbestos-ridden tower blocks, and was censured by a High Court judge for his role in an £18m raid on a pension fund. The board was understood to be more concerned with his competence. Officially, the party announced that the post of chief executive had been abolished after a "strategic review".

Tory Central Office tried to slip out the announcement minutes before the Commons vote on foundation hospitals. But it only overshadowed attempts to embarrass the Government.

There is speculation that Sir Stanley Kalms, the Tory chairman, has pledged his own money for Mr Legg's pay-off.