Sue Gray has resigned from her position as Sir Keir Starmer's chief of staff, Number 10 has announced.
Ms Gray has instead been appointed as the prime minister's envoy for nations and regions.
Morgan McSweeney, the party's former campaign director who masterminded July's election landslide, will replace her as the prime minister's chief of staff.
Ms Gray said that while it had been "an honour to take on the role of chief of staff", it had become clear that "intense commentary around my position risked becoming a distraction to the government's vital work of change".
"It is for that reason I have chosen to stand aside, and I look forward to continuing to support the prime minister in my new role."
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The prime minister thanked Ms Gray - who famously authored the report into parties in Downing Street during the pandemic - for "all the support she has given me, both in opposition and government and her work to prepare us for government and get us started on our programme of change".
"Sue has played a vital role in strengthening our relations with the regions and nations. I am delighted that she will continue to support that work," he added.
Ms Gray's resignation follows weeks of speculation about her role and reports of a power struggle at the heart of government.
Tensions over Ms Gray's role reached a crescendo when her salary of £170,000 - £3,000 more than the prime minister - was leaked to the BBC in an apparent attempt to damage her politically.
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The broadcaster also reported more junior staff were disgruntled they were not being paid more than what they received when Labour was in opposition - despite now occupying more senior government roles.
Government 'thrown into chaos'
A Conservative Party spokesperson described the latest moves in Downing Street as "chaos" and questioned who was running the country.
"In fewer than 100 days Sir Keir Starmer's Labour government has been thrown into chaos - he has lost his chief of staff who has been at the centre of the scandal the Labour Party has been engulfed by," they said.
Blame for this mess lies with Sir Keir
Sam Coates
Deputy political editor
@SamCoatesSkySir Keir Starmer has now gone full circle. At lunchtime he replaced Sue Gray, the former civil servant whose appointment has caused him endless pain, with Morgan McSweeney.
While the elevation of his campaign chief was widely welcomed, this is nevertheless a curious move.
Mr McSweeney was his very first chief of staff back in opposition in 2020 and for the first 14 months of his leadership, until he was moved after the botched reshuffle of 2021.
Cabinet members and Labour MPs must hope second time around he will be a better fit.
In doing so, the prime minister is in effect admitting very big personnel mistakes, forced to act eventually because of complaints from every side around him that the situation had become untenable.
At its heart, Ms Gray - who was known in Whitehall as the consummate fixer - had to go because nothing felt like it was being fixed.
She was in charge of preparations for government, but when 5 July arrived they appear scant and progress from there was slow.
But blame for this should lie not with her but with Sir Keir. If there had been enough due diligence on the appointment, some of these problems might have been anticipated.
"Sue Gray was brought in to deliver a programme for government and all we've seen in that time is a government of self-service.
"The only question that remains is: who will run the country now?"
One Labour insider told Sky News that the current leadership "spent years saying how it was time to professionalise the party - but this chaos with Keir Starmer seems remarkably similar to the chaos with Jeremy Corbyn".
They pointed out that Mr McSweeney previously served as Sir Keir's chief of staff between 2020 and 2021 before being moved on to his campaign role.
In a major announcement on Sunday, Sir Keir also announced a shake-up of his entire Downing Street operation following disquiet at how the party handled rows over freebies and donations, as well as its decision to axe winter fuel payments for most pensioners.
Vidhya Alakeson and Jill Cuthbertson have been promoted to deputy chiefs of staff, while Nin Pandit has been appointed as Sir Keir's parliamentary private secretary.
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Meanwhile, former journalist James Lyons will join from TikTok to lead a new strategic communications team.
The prime minister said he was "really pleased to be able to bring in such talented and experienced individuals into my team"
"This shows my absolute determination to deliver the change the country voted for," he added.
One source told Sky News that the news of Ms Gray's departure came on Sunday after plans for the reorganisation announcement on Monday were leaked to the media.
Her advisory role will be to support Sir Keir and the cabinet in delivering on its devolution agenda.
One former senior adviser in Number 10 told Sky News that "without the authority of the prime minister and the proximity to him, this 'envoy' role will not be a serious position in government".
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