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In his resignation letter, he launched a scathing attack on the government, saying it was "dangerous and unrealistic" for Labour to continue in power without an immediate general election.
"The country cannot afford a government whose main concern is surviving from week to week," he said.
His resignation leaves Prime Minister James Callaghan, who has been in power for just two days, with 315 MPs to the opposition parties' 316.
The MP is accused of faking his own death in a bizarre series of events which began with his apparent drowning off a beach in Miami in November 1974.
He was arrested while living under a false name in Melbourne, Australia, five weeks later.
He faces 18 charges of theft, forgery, attempted insurance frauds and conspiracy involving more than £170,000. His secretary, Sheila Buckley, also faces various charges of theft and conspiracy.
In his resignation letter, he accused his constituency, Walsall North, of prejudging him by discussing his political future ahead of his trial at the Old Bailey in three weeks' time.
A meeting of the Labour Party management committee in Walsall North last month voted 47-1 to ask Mr Stonehouse to resign.
When he refused, he was told he would not be re-selected as the official Labour candidate at the next general election.
Mr Stonehouse will now act as an independent, ending 19 years as a Labour MP.
The development could cause serious problems for the government's legislative timetable, possibly delaying proposed bills on nationalising the aircraft and shipbuilding industries and extending the dock labour scheme.
The immediate argument, however, was over the number of MPs allowed to sit on committees.
Both the Conservative Chief Whip, Humphrey Atkins, and the Liberal Chief Whip, Alan Beith, are calling for committees to have a majority of members from the opposition parties, to reflect the new balance of power in the House of Commons.
John Stonehouse's first speech to the Commons as an independent MP, two days later, was boycotted by almost the entire Labour Party.
He was forced to address near-empty benches, and not one vote was cast in favour of his proposal for an early general election.
Shortly afterwards he joined the English National Party, a fringe party with about 5000 supporters.
His trial began on 27 April 1976. After a marathon 68 days, the MP was convicted and sentenced to seven years' imprisonment.
Sheila Buckley was sentenced to two years' imprisonment, suspended for two years.
Stonehouse resigned as an MP on 28 August.
He was released from prison in 1979 on health grounds, and married Ms Buckley in 1981. He died of a heart attack in 1988, aged 62.
The government of James Callaghan clung on to power with the Lib-Lab pact of 1977, but finally lost the 1979 general election to the Conservative Party under Margaret Thatcher.
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