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In a dramatic resignation speech to parliament, Short said she was shocked and ashamed by a British-backed U.N. draft resolution which would give Washington and its allies control over Iraq's post-war oil revenues.
"This resolution undermines all the commitments I have made in (parliament) and elsewhere about the reconstruction of Iraq," Short said. "Clearly this makes my position impossible."
In a blunt attack on Blair's near-total loyalty to President Bush she said Britain was "making grave errors in providing cover for the U.S. mistakes," undermining international law and increasing risk of terrorist attacks.
Short, 57, was the second senior minister to resign from Blair's cabinet over the Iraq war, which was opposed by many members of his ruling Labour Party and which triggered a major parliamentary rebellion in March.
Within minutes of her decision -- which came as little surprise after an earlier threat to resign on the eve of war -- Blair's office said it was replacing Short with junior Foreign Office minister, Guyanese-born Baroness Amos.
The speed of the move suggested Blair was preparing to remove her anyway and analysts doubted her exit would have much impact on a premier riding high in opinion polls and facing little threat from an unpopular opposition Conservative Party.
But the scathing criticism from a senior minister, widely admired for her tireless work promoting international development during six years in office, will provide plenty of ammunition for critics within Blair's ruling Labour Party.
BLAIR "CONTROL FREAK"
Short launched a fierce attack on Blair's entire system of government, criticizing a "control freak" style, media manipulation and obsession over his place in history.
The centralization of power in the hands of Blair and a handful of advisers meant power was being wielded with ever-decreasing accountability and scrutiny, leading to government by "diktat" rather than collective responsibility.
"Thus we have the powers of a presidential-type system with the automatic majority of a parliamentary system," Short said.
Blair was "in danger of destroying his legacy as he becomes increasingly obsessed by his place in history," she added.
Short, who first came to prominence as an anti-pornography campaigner, never flinched from speaking out, winning respect for her honest commitment even from political opponents.
She embarrassed Blair during the 1997 campaign by calling for higher taxes. No stranger to taking a stand, she twice resigned party office while in opposition, once over the 1991 Gulf War.
Widowed 10 years ago, her personal life gained her public sympathy when, in 1996, she was joyfully reunited with a son whom she had given up for adoption more than 30 years earlier.