By Stephen Addison
LONDON (Reuters) - British Prime Minister David Cameron was forced into a hasty cabinet reshuffle on Saturday after the dramatic resignation of a senior minister that threatens to widen divisions over Europe within the ruling Conservative party.
The rancorous departure of Work and Pensions Secretary Iain Duncan Smith, a leading campaigner for Britain to quit the European Union, also deals a blow to the political ambitions of finance minister George Osborne, commentators said.
Cameron and Osborne are both urging Britons to vote to remain in the EU in a June 23 referendum but many Conservative lawmakers and activists favor a "Brexit". The issue has riven the party for decades.
In his resignation letter on Friday, Duncan Smith -- a former Conservative party leader -- cited cuts to disability benefits outlined in Osborne's annual budget last week, which also included tax cuts for richer households. He complained about pressure from the Treasury to cut welfare payments.
Duncan Smith wrote: "I am unable to watch passively whilst certain policies are enacted in order to meet the fiscal self-imposed restraints that I believe are more and more perceived as distinctly political rather than in the national economic interest."
Responding, Cameron said he was "puzzled and disappointed" by Duncan Smith's decision to leave the Cabinet post he has held since 2010. His Downing Street office announced on Saturday that Duncan Smith's post had been filled by former Welsh Secretary Stephen Crabb, who wants Britain to stay in the EU.
The bitter tone of the letter from the self-styled "quiet man" of British politics was reminiscent of a speech made by senior minister Geoffrey Howe when he quit Margaret Thatcher's cabinet in 1990 over Europe, which contributed to her downfall.
Cameron has said he will step down before an election in 2020 and close ally Osborne hopes to replace him as Conservative leader and prime minister.
But he faces a growing rebellion from within his own party over the plan which tightens eligibility criteria for a state benefit which supports the disabled or long-term sick.
Bookmakers on Saturday lengthened the odds on the chances of Osborne succeeding Cameron. In contrast, odds have shortened on another potential successor, London Mayor Boris Johnson, who is backing a 'Out' vote in June.
"So sure-footed for so long, Mr Osborne was widely regarded as Cameron's natural and chosen successor, but recent blunders seem to have dealt him a serious blow to achieving that outcome and punters have begun defecting from him to Boris," bookmaker William Hill said. "Mr Duncan Smith's resignation has dealt Mr Osborne another blow."
Duncan Smith's move also handed the struggling opposition Labour party a much-needed propaganda boost by exposing government divisions, and its leader Jeremy Corbyn was quick to demand Osborne's resignation.
"The resignation of Iain Duncan Smith reveals a Government in disarray and a Chancellor who has lost the credibility to manage the economy in the interests of the majority of our people," he said in a statement.
"The Chancellor has failed the British people. He should follow the honorable course taken by Iain Duncan Smith and resign."
Most commentators believed Duncan Smith's resignation was a genuine matter of principle over the severity of welfare cuts but several noted he would now be able to campaign within parliament for an 'Out' vote, free from any possible constraints of government.
"Mr Duncan Smith's departure blows apart any prospect of a restrained debate in the ... party over Europe," wrote the Financial Times.
(Editing by Catherine Evans)