He threw in the towel after facing an ultimatum from Mr Cameron to justify channelling more than £400,000 in staff allowances to a family business of which he is a paid director.
Giles Chichester has resigned as leader of David Cameron's Conservative Euro MPs after breaking European Parliament rules on political expenses.
Mr Chichester stayed on as a Tory MEP, but stepped down from the top job to limit embarrassment to Mr Cameron - who had asked him only three months ago to clean up Tory MEP allowances in the wake of a scandal at Westminster over MP Derek Conway.
In a statement, the Conservative Party said Mr Chichester stepped down after chairman Caroline Spelman asked him to provide a full explanation of the arrangements put in place to fund his staff.
Mr Chichester chose to step down with immediate effect to prepare his report to the European Parliament authorities, said the party.
Mr Cameron said: "Giles Chichester is right to stand down as leader of our MEPs to prepare a full explanation of how his office is funded.
"Just as I expect our MPs to adhere to the highest standards, so must our MEPs.
"The tax-paying public have a right to know how their money is being spent and politicians have a duty to ensure it is spent properly."
Deputy leader Philip Bushill-Matthews will take over as acting leader.