Dr Smith revealed that, in addition to the reference letter on ministerial letterhead for Ms Pullar, he had signed a second letter relating to her case in which he had not declared his conflict of interest.
The second letter referred to was written in 2010, when another MP was advocating for Ms Pullar to Pansy Wong, the then-Associate Minister of ACC.
"Pansy Wong, quite properly said that this was a friend of hers, she was on her campaign committee, and declared a conflict of interest, and referred that letter back to myself,'' Dr Smith told Parliament.
"ACC prepared a formal response to that letter, I signed out that error back to that constituent without acknowledging that I too had a conflict of interest.''
While Dr Smith maintained that he had not tried to interfere in Ms Pullar's claim, he said his decision to resign was the "proper'' one.
"It was that second letter in which, having not erred once but erred twice, that has brought about my resignation,'' he said.
"I do accept that the signing of those two letters is not up to the standard this Parliament can rightly expect of its ministers.''
Choked up with emotion, Dr Smith offered apologies to the Prime Minister, his caucus, his family and staff.
"It is my intention to serve out this term of Parliament, I love this place,'' he said.
"I'm disappointed I'm not going to be able to continue my work in some of those areas I have a passion, but I apologise to all my fellow representatives for those misjudgments.''
There has been speculation that Dr Smith had a sexual relationship with Ms Pullar, but he would not confirm that.
Dr Smith told reporters he would not comment on his private life, "except to say that I have a wonderful wife and family''.
"I have been absolutely loyal to my wife, and I will be to the end of my days.''
Following Dr Smith's announcement, Mr Key said the reference letter his minister had written had been "close to the line'', and the second letter had been a step too far.
"It's not just once that he's shown poor judgement, it's twice, and on that basis, it's quite clear he should have made his conflict of interest also known, he shouldn't have had anything to do with the complainant, he should have delegated that responsibility as other ministers do,'' Mr Key said.
Opposition parties have called for an independent inquiry into Dr Smith's actions, but Mr Key said he did not think one was necessary.
"The Privacy Commissioner and the police are having their inquiries, and they'll carry on in the fullness of time. I haven't seen anything else that strikes me that I don't understand what has gone on in this particular instance,'' Mr Key said.
Labour leader David Shearer criticised Mr Key's handling of the situation, saying he should have asked for Dr Smith's resignation yesterday, and that he was using the second letter as a smoke screen.
"He had enough information and enough cause to sack Nick Smith yesterday but he failed to do so, this is not living up to his high standards,'' Mr Shearer said.
"That first letter was a clear breach of Cabinet guidelines, Nick Smith was in fact advocating for a friend in his position as a minister and it was completely wrong.''
Mr Key said Gerry Brownlee, Craig Foss and Chris Finlayson would act in Dr Smith's local government, climate change issues and environment portfolios respectively, until a permanent appointment was made.
Mr Key said it was possible that Dr Smith could be reinstated as a minister in the future, but there had been no deal made to bring him back.
Dr Smith today revealed that, in addition to the reference letter on ministerial letterhead for Ms Pullar, he had signed a second letter relating to her case in which he had not declared his conflict of interest.
The second letter was written in 2010, when another MP was advocating for Pullar to Pansy Wong, the then-Associate Minister of ACC.
Dr Smith is the third minister in Mr Key's Government to lose their portfolios for misuse of their position or improper conduct. Internal Affairs Minister Richard Worth lost his job in 2009 following a sex scandal while Ethnic Affairs Minister Pansy Wong resigned after the Auditor General found she and her husband misused ministerial travel funding.
A fourth minister, former Fisheries Minister Phil Heatley lost his portfolio in early 2010 for misusing his ministerial credit card but was later reinstated following an investigation by the Auditor General.
Earlier today, Mr Key was backing Dr Smith, maintaining that Dr Smith's July 2011 letter on ministerial letterhead was lapse of judgement but not a serious matter.
Mr Key was refusing to comment on speculation about the exact nature of Dr Smith and Ms Pullar's relationship but said he was satisfied with Dr Smith's account of events.
