"This morning, Tom Daschle asked me to withdraw his nomination for secretary of health and human services," President Obama said in a statement. "I accept his decision with sadness and regret."
Daschle, who had been tapped to lead a major reform of the costly U.S. health care system, had been battling to save his nomination since reports surfaced that he paid more than $140,000 in back taxes and interest last month. Daschle also had potential conflicts of interest from amassing more than $5 million in income from health groups he'd be tasked with regulating.
He said he's withdrawing because he's not a leader who has the full faith of Congress and will be a distraction.
President Obama acknowledged an error after Daschle withdrew his nomination, saying, "I've got to own up to my mistake." A day earlier, Mr. Obama had said he "absolutely" stood by Daschle.
Mr. Obama made the admission in an interview with NBC as part of a media blitz to rally support for a nearly $900 billion economic stimulus plan, an effort overshadowed by the latest embarrassing setback in the formation of his cabinet.
"I've got to own up to my mistake which is that ultimately it's important for this administration to send a message that there aren't two sets of rules. You know, one for prominent people and one for ordinary folks who have to pay their taxes," President Obama said, according to a transcript of the interview.
Daschle's withdrawal came less than three hours after another nominee also withdrew from consideration, also over tax problems. Nancy Killefer, nominated by President Obama to be the government's first chief performance officer, said she didn't want her bungling of payroll taxes on her household help to be a distraction.
She was the third high-profile presidential appointee to be plagued by tax-related issues, putting a blot on a transition to power that the Obama administration had hoped would be controversy-free.
Killefer, a director at management consulting firm McKinsey & Company and a former assistant Treasury secretary in the Clinton administration, had been named to a newly created position working with economic officials to increase efficiencies and eliminate waste in government spending.
"I recognize that your agenda and the duties facing your chief performance officer are urgent," Killefer wrote in the letter to the president, asking for her nomination to be withdrawn.
"I have also come to realize in the current environment that my personal tax issue of D.C. unemployment tax could be used to create exactly the kind of distraction and delay those duties must avoid."
Obama declined to answer a shouted question about the issue during a ceremony announcing his pick for commerce secretary, Republican Sen. Judd Gregg of New Hampshire.
A White House spokesman said Killefer's request had been accepted.
"She has withdrawn and we accepted her withdrawal," he said. Killefer, who would have served as the deputy director of the Office of Management and Budget, would have required confirmation by the U.S. Senate for her position.
Tax problems also plagued Treasury Secretary Timothy Geithner, whose nomination was also held up for tax issues, although he was eventually confirmed.
Killefer did not go into detail about the unemployment tax mentioned in her letter. She said her request for withdrawal was made with reluctance.
Obama has repeatedly promised that his administration would go "line by line" over its budgets with a focus on fiscal responsibility even as he seeks huge amounts of money to stimulate the U.S. economy.
The president, Vice President Joe Biden and Daschle's former Democratic colleagues had rallied to Daschle's defense in the wake of questions about a series of tax issues. Last month, he paid $128,203 in back taxes and $11,964 in interest.
"Tom made a mistake, which he has openly acknowledged," Mr. Obama said. "He has not excused it, nor do I. But that mistake and this decision cannot diminish the many contributions Tom has made to this country."
Daschle also was facing questions about potential conflicts of interests related to the speaking fees he accepted from health care interests. Daschle also provided advice to health insurers and hospitals through his post-Senate work at a law firm.
The withdrawal came after Republicans and major newspapers questioned the president's decision to stick with Daschle in the wake of campaign promises to hold a strong line on questions of ethics.
Republican Sen. Jim DeMint of South Carolina said Mr. Obama was "losing credibility" with his statements in support of Daschle. "Part of leadership is recognizing when there has been a mistake made and responding quickly," the Republican said, according to the Associated Press.
In an editorial, The New York Times described Daschle's ability to move "cozily between government and industry" as a cloud over any role he might play in changing the nation's health care system.
The Chicago Tribune opined that "Daschle is dispensable" and suggested that "to proclaim high standards and then suspend them exposes Obama to charges that he is either hypocritical or obtuse."