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LONDON (Reuters) - Defence Secretary Liam Fox resigned on Friday over his friendship with a businessman who posed as his adviser, jolting Prime Minister David Cameron's coalition government and potentially slowing down efforts to reform the military.
Cameron named Transport Secretary Philip Hammond, generally seen as a safe pair of hands, as the new defence secretary. Hammond is considered to be on the right of the governing Conservative Party, but not to the same extent as Fox, around whom many ministers had rallied before his resignation.
Fox, 50, who oversaw military operations in Afghanistan and Libya, admitted he had allowed the lines between his personal and professional life to blur.
The media have in the last week been awash with stories about the relationship between Fox and his former flatmate and best man, Adam Werritty, 34, who met often with Fox at the defence ministry and on his official trips abroad.
"I mistakenly allowed the distinction between my personal interest and my government activities to become blurred," Fox said in a resignation letter to Cameron.
"The consequences of this have become clearer in recent days. I am very sorry for this."
The loss of Fox amid accusations of impropriety could open Cameron up to allegations of sleaze, a failing that helped doom the last Conservative-led government in a 1997 election, relegating the party to opposition for the next 13 years.
Cameron can ill-afford the government's authority to be compromised as it pushes through the toughest austerity measures in a generation to tackle a big budget deficit. The integrity of parliament itself has only recently recovered from an expenses scandal that saw several legislators prosecuted.
However, pending any further revelations about Fox's conduct, his departure is not seen as a fatal blow.
"It's a setback for the government but not destabilising ... This is embarrassing for the government, it doesn't help their reputation, but it's not a fundamental game changer," said Wyn Grant, politics professor at the University of Warwick.
Cameron had given Fox, 50, his support pending the findings of an inquiry, due within days, into whether he had broken ministerial rules by allowing Werritty to benefit financially from their friendship or have access to classified information.
In a letter, Cameron said he was "very sorry" to see Fox go, and praised the "superb job" he had done.
"He did a good job at the Ministry of Defence clearing up the mess left by the last government and giving good leadership to that department particularly while we have been in action in Libya and also in Afghanistan as well," Cameron told reporters.
With Fox no longer defence minister, relations with Cameron may not be so cordial in future.
Fox challenged Cameron for leadership of the Conservative Party in 2005, and the prime minister now faces the prospect of a powerful and charismatic rival on his party's back-benches.
Fox is the flag bearer for the Conservatives' vocal right-wing and could become a source of friction for Cameron, who is already under attack from right-wingers who accuse him of ceding too much ground to the Liberal Democrats.
"While he (Fox) may not have credibility as a leadership contender, he could undermine David Cameron from the back benches," said Steven Fielding, director of the Centre for British Politics at Nottingham University.
Potential unrest among Cameron's restive colleagues over Fox's departure is likely to be assuaged by the fact that Fox chose to step down without apparent pressure from the prime minister, who had allowed an unusually long time for an investigation to look into Fox's conduct.
"I think Cameron will be OK on this. He's not been seen to force him out. He's given him enough time to explain himself .... I don't think anyone in the Conservative Party will think Cameron acted badly or have the knives out for him," said Tim Bale, politics professor at Sussex University and author of a book on the Conservatives.
Fox's successor would have to implement a radical and difficult plan to slim down and reconfigure the military, as well as manage the eventual return of British troops from Afghanistan and take decisive action during future conflicts.
The government last year announced an eight percent cut in real terms to the 34 billion pound ($53.7 billion) defence budget over four years, and many of the initiatives Fox outlined to reduce costs have yet to be implemented.
Other government departments received cuts of up to 20 percent, and the defence ministry's more lenient treatment was seen partly as a result of Fox winning a fierce and public spat with the treasury (finance ministry).
"Keeping a handle on the budget, particularly the equipment budget, requires constant political care and attention .... You need strong leadership and willingness to take hard decisions which will offend people," said Malcolm Chalmers of the Royal United Services Institute defence think-tank in London.
"The danger is that if there isn't strong pressure from the secretary of state to keep the defence budget under control, then that role will devolve back to the treasury," he said, adding that would lead to confusion on procurement.
Defence firms are already in the throes of trying to readjust to new procurement policies introduced under Fox, including a "name and shame" initiative for defence firms who do not stick to time and cost constraints, and a push for firms to develop less specialised, more exportable hardware.
"As far as the defence industry is concerned, what we really want is to have a degree of consistency," said Hugh Toler of Allocate Software, which has a defence division.
Additional reporting by Tim Castle, Matt Falloon and Adrian Croft, Editing by Mark Heinrich