Immigration Minister Beverley Hughes has resigned after admitting she "unwittingly" misled people about a suspected visa scam.
Hughes has faced ongoing pressure
The Tories had accused the Home Office of approving visa claims from eastern Europe despite warnings they were backed by forged documents.
Ms Hughes had dismissed calls to quit, saying she had not known of the claims.
But No 10 said it was now clear she was warned about it a year ago, by Labour deputy chief whip Bob Ainsworth.
Ms Hughes said she had not set out to "intentionally mislead anyone", but she could not "in conscience continue to serve as immigration minister".
The prime minister has replaced Ms Hughes with Work and Pensions Minister Des Browne.
Mr Blair denied reports he would be taking personal charge of immigration but said he would take "a close interest" in the issue.
Speaking at his monthly press conference, Mr Blair said there would be "swift action" if it proved there had been systematic fraud.
"It's pretty obvious to me that something was seriously wrong," he added.
The question of whether fraudulent claims were deliberately approved - or whether officials mistakenly believed the applications had to be allowed - is still being investigated.
But the prime minister dismissed suggestions that Home Secretary David Blunkett should also resign.
He urged people not to assume the same problems were happening across the whole immigration system, stressing that the vast majority of immigrants were lawful and made a great contribution to Britain.
Matter of conscience
In a personal statement in the House of Commons, Ms Hughes insisted she had "acted properly" at all times.
But it had "become clear that, however unwittingly, I may have given a misleading impression" in media interviews on Monday.
WHO KNEW WHAT WHEN
March/April 2003: Bob Ainsworth raises concerns with Beverley Hughes
Monday night: Ms Hughes tells Newsnight she knew nothing about scam claims until they were raised by the Tories
Tuesday evening: Mr Ainsworth reminds Ms Hughes of the letters when he bumps into her in Parliament.
Tuesday dinner: Ms Hughes discusses them with her boss, David Blunkett
Wednesday: Ms Hughes sees the full papers. Tony Blair told about the letters before prime minister's questions
Source: Downing Street
She said she decided to quit when she came across a letter sent to her on 4 March last year by Mr Ainsworth, then a junior Home Office minister, alerting her to potential immigration abuses.
Similar allegations - about abuse of the European Community Association Agreement (ECAA) - had already been raised by James Cameron, the British consul in Romania who blew the whistle to the Conservatives.
Ms Hughes had told BBC Two's Newsnight on Monday that Mr Cameron's claims were the first she knew of the alleged "scam".
But it is now clear she sent letters in March and April 2003 in reply to Mr Ainsworth's concerns.
The home secretary praised Ms Hughes' honesty and said she had acted on Mr Ainsworth's concerns at the time.
Mr Blunkett described Thursday as the "worst personal day" of his political life and blamed weeks of media "vitriol" for forcing her resignation.
The Conservatives and Liberal Democrats are demanding an independent inquiry into the immigration allegations, saying the current in-house probe will not inspire confidence.
Tory leader Michael Howard told BBC News 24: "It is quite clear from what's happened over the last month that the government's policy on immigration is in chaos."