A strong supporter of chancellor Gordon Brown, Smith said he resigned to spend more time working in his constituency and with his family.
No successor has yet been named but it is rumoured that former health secretary Alan Milburn could return to the cabinet.
Milburn is a staunch Blairite.
Not surprisingly, the Tories immediately seized on the news, saying the resignation of Smith was an indication of the stand-off between Gordon Brown and Tony Blair.
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