Mr Banks said said he would continue to support the Government on confidence and supply votes, and would stay on as MP for Epsom and Act leader.
"My focus will now be on clearing my name and serving the people of Epsom," Mr Banks said.
Mr Banks' resignation means National has lost two of its support party ministers - United Future leader Peter Dunne resigned as minister after refusing to provide emails to an inquiry into the leak of a GCSB report.
Mr Key said he had accepted Mr Banks offer to resign as a minister.
"Mr Banks indicated to my Chief of Staff late last week that in the event the Judge ruled against him, he would tender his resignation as a Minister," Mr Key says.
"It is with regret that I announce today that I have accepted that resignation, and will be advising the Governor-General accordingly."
Mr Key said that even though the events occurred before Mr Banks entered Parliament in 2011, "this is totally the right call".
He said that if Mr Banks was found not guilty or made a successful appeal, he would be reinstated as a minister.
Mr Key said the resignation as a minister did not mean a snap election was more likely.
He said Mr Banks had promised to keep supporting National on confidence and supply, and was a "highly reliable" coalition partner.
Even without that, National could still get a majority with its other coalition partners - the Maori Party - so the stability of Government was not at risk.
The Prime Minister said Mr Banks had been an able, competent and reliable minister.
Mr Banks had confirmed that he would continue to meet the terms of Act's confidence and supply agreement with the National Party, which meant key pieces of legislation would not be affected.
Mr Key said Mr Banks' small business and regulatory reform portfolios would be reallocated this week.
Mr Key said he agreed with Mr Banks' s analysis "that it wasn't possible for him to stay as a minister while he now potentially faces a court action."
He had this afternoon discussed Mr Banks' next steps with him.
"They could include obviously going off and fighting his corner in the defence of the action that's been brought against him in the courts, or he could ultimately look to appeal the current decision to the High Court.
"If he was to appeal to the High Court and they were to overturn the District Court's decision this afternoon or if he was to go through the court case and successfully defend that, then it would be my expectation he would be returned as a minister."
In response to calls from the Greens for Mr Banks to abstain from voting on the SkyCity legislation, Mr Key said he couldn't see any reason why Mr Banks shouldn't vote.
He said there was no new information of any significance that had emerged from this week's hearing.
"To me it's just another political stunt from the Greens and if I was him I'd be voting."
In any case, with Labour an MP down until the Christchurch East by-election which was unlikely to take place before the vote on the legislation, his vote was not required anyway.
Mr Key said Mr Bank's saying he intended to continue with the confidence and supply agreement with National, his resignation as minister made absolutely no difference to his Government from either a voting or stability perspective.
"In essence the National Government today has lost a minister from one of its support parties but the Government hasn't lost any ballast in terms of its overall voting majority."
Labour leader David Cunliffe said Mr Banks had might the right decision by resigning from his portfolios.
But he added that Mr Key should have read the police report on Mr Banks' electoral donations and stood the Act leader down a year ago.
Mr Cunliffe said the National-led Government was become increasingly unstable.
"I've said before that this is a third-term Government in its second term. This is a Government that is looking increasingly out of touch... and this is a further development that happens when Governments are starting to fall apart."
Asked whether Mr Key should be considering a snap election now that two of National's support parties were led by resigned ministers, Mr Cunliffe said: "Go ahead. Make our day. We're on a roll, we're ready to govern."
Banks had denied the charge of filing a false electoral return after Wellington man Graham McCready filed a private prosecution against him.
In the Auckland District Court this afternoon, Phil Gittos said sufficient evidence had been presented to send the matter to trial.
Mr McCready was not in court for the decision this afternoon.
McCready supporter Penny Bright told reporters he had not attended court today because he was not well and was not feeling confident after yesterday's hearing.
Banks' lawyer David Jones, QC, said he would plead not guilty.
Banks was remanded at large until December 17.
The decision came after a hearing yesterday during which internet mogul Kim Dotcom gave evidence that he was offended when told Banks wanted his $50,000 mayoral campaign donation to be anonymous.
Mr Dotcom said he was asked to split his donation into two anonymous $25,000 cheques.
"My reaction at first was I asked him why and I kind of felt offended,'' he told the court.
Mr Dotcom also confirmed Banks was flown in his private helicopter from Mechanics Bay in central Auckland to the Dotcom mansion in Coatesville in 2010.
Mr Dotcom's head of security Wayne Tempero also gave evidence of being present on the helicopter flight, and at a meeting in Coatesville when the two $25,000 cheques were discussed.
SkyCity boss Nigel Morrison told the court of handing Banks a cheque in an envelope at a meeting in 2010.
Mr Morrison confirmed details from his statement made to police in 2012, including that he made the same donations to Banks' and Len Brown's mayoral campaigns.
Banks' donation was handed over during a 10-minute meeting in Mr Morrison's office.
