David Cameron has said he is "puzzled and disappointed" after Iain Duncan Smith dramatically quit the Cabinet and launched an all-out attack on the "indefensible" Budget.
In a brutal parting shot, the Work and Pensions Secretary complained that cuts to disabled benefits in George Osborne's financial package were "politically driven" and suggested the Chancellor had abandoned the austerity principle of "all in this together".
"I have for some time and rather reluctantly come to believe that the latest changes to benefits to the disabled and the context in which they've been made are a compromise too far," Mr Duncan Smith wrote in his resignation letter.
"While they are defensible in narrow terms, given the continuing deficit, they are not defensible in the way they were placed within a Budget that benefits higher earning taxpayers. They should have instead been part of a wider process to engage others in finding the best way to better focus resources on those most in need.
"I am unable to watch passively whilst certain policies are enacted in order to meet the fiscal self-imposed restraints that I believe are more and more perceived as distinctly political rather than in the national economic interest."
Mr Duncan Smith has been at loggerheads with Mr Cameron and Mr Osborne over whether Britain should stay in the EU, joining a handful of other Cabinet ministers in calling for Brexit. But his letter to the Prime Minister indicated that the row over cuts to the Personal Independence Payment (PIP) had been the last straw.
His announcement came hours after the Treasury signalled a humiliating climbdown over the plans to change PIP assessment criteria, which were expected to slash around £1.3 billion a year off the cost.
Government sources said they wanted to kick the proposals - initially announced by the Department for Work and Pensions last week - "into the long grass" and were not "wedded" to the savings figures featured in the Budget.
Mr Osborne has also retreated on two other Budget issues that ran into strong opposition from Tory backbenchers - promising legislation next week to abolish the so-called "tampon tax" and ruling out higher VAT on solar panels and energy efficiency equipment.
In his letter responding to Mr Duncan Smith, Mr Cameron wrote: "I regret that you have chosen to step down from the Government at this moment.
"Together we designed the Personal Independence Payment to support the most vulnerable and to give disabled people more independence. We all agreed that the increased resources being spent on disabled people should be properly managed and focused on those who need it most.
"That is why we collectively agreed - you, No 10 and the Treasury - proposals which you and your department then announced a week ago. Today we agreed not to proceed with the policies in their current form and instead to work together to get these policies right over the coming months.
"In the light of this, I am puzzled and disappointed that you have chosen to resign."
Labour leader Jeremy Corbyn and Liberal Democrat chief Tim Farron have demanded that Mr Osborne follow Mr Duncan Smith's example and resign.
"The Budget has exposed George Osborne's record of profound unfairness and economic failure. Not only must the cuts to support for disabled people be abandoned, but the Government must change economic course," Mr Corbyn said.
"The Chancellor has failed the British people. He should follow the honourable course taken by Iain Duncan Smith and resign."
Mr Duncan Smith said he was "incredibly proud" of the welfare reforms he had overseen over the past five years.
"Throughout these years, because of the perilous public finances we inherited from the last Labour administration, difficult cuts have been necessary," he said.
"I have found some of these cuts easier to justify than others but, aware of the economic situation and determined to be a team player, I have accepted their necessity.
"You are aware that I believe the cuts would have been even fairer to younger families and people of working age if we had been willing to reduce some of the benefits given to better-off pensioners but I have attempted to work within the constraints that you and the Chancellor set."
Mr Duncan Smith, who said he was resigning with "enormous regret", delivered a withering assessment of Mr Osborne's fiscal rules - which include an overall cap on welfare spending, cutting debt as a proportion of GDP every year, and recording an absolute surplus by 2020.
The Chancellor has already breached the welfare cap and confirmed in Wednesday's Budget that he would break the debt rule.
Mr Duncan Smith wrote. "Too often my team and I have been pressured in the immediate run-up to a Budget or fiscal event to deliver yet more reductions to the working age benefit bill.
"There has been too much emphasis on money-saving exercises and not enough awareness from the Treasury, in particular, that the Government's vision of a new welfare-to-work system could not be repeatedly salami-sliced."
In the most cutting passage, Mr Duncan Smith cited a phrase often used by Mr Cameron and Mr Osborne, stating: "I hope as the Government goes forward you can look again ... at the balance of the cuts you have insisted upon and wonder if enough has been done to ensure 'we are all in this together'."
Tory MP and fellow Brexit campaigner Peter Bone said: "IDS has always been a man of conviction! Tonight, yet again he put the country first."
Andrew Percy, who led a Conservative backbench revolt against the PIP cuts, wrote on Twitter: "Credit to IDS. I'll say no more tonight but all is not as it has seemed in the past few days."
Tory backbencher Jacob Rees-Mogg said that Mr Duncan Smith had been "as important a welfare secretary as I can think of" and it was a blow for the Government to lose such a "substantial figure".
But a number of Labour MPs insisted Mr Duncan Smith's departure was driven by the EU referendum battle.
Former frontbencher Chuka Umunna said: "IDS resigning has everything to do with the EU and nothing to do with welfare - why wait this long after causing misery to so many to resign?"