The director of the London School of Economics has resigned over its links to Libyan leader Col Muammar Gaddafi.
Sir Howard Davies told the BBC the university's reputation had been damaged, and "I need to take the responsibility for that".
He said the decision to accept £300,000 for research from a foundation run by Col Gaddafi's son Saif had "backfired".
The LSE council has commissioned an independent inquiry into the university's relationship with Libya.
It will seek to clarify the extent of the LSE's links with Libya and establish guidelines for future donations.
Lord Woolf, former Lord Chief Justice of England and Wales and former chairman of the Council of University College London, has been appointed to carry it out.
Sir Howard said he had resigned because of two "errors of judgement" - advising the LSE to accept the donation from Saif Gaddafi's foundation and visiting Libya to advise its regime about financial reforms.
'Hard to defend'
"I have concluded that it would be right for me to step down even though I know that this will cause difficulty for the institution I have come to love," he said.
There were risks involved in taking funding from sources associated with Libya which should have been weighed more heavily in the balance, he concluded in his resignation letter.
He said the decision to accept the British government's invitation to become an economic envoy to Libya had "muddled" his personal position and his role at the LSE.
A former head of the Financial Services Authority and deputy governor of the Bank of England, Sir Howard gave advice to the Libyan Investment Authority.
He said he was offered a $50,000 (£30,700) fee for doing so, but asked that it be used for a scholarship at the LSE.
But he said he did not believe the institution's academic independence had been sacrificed in the pursuit of donations.
"We have been absolutely scrupulous to ensure that there was no control over the research agenda by the people making the donations," he said.
However, he defended a £2.2m contract for LSE Enterprise - a company linked to the university - to train Libyan civil servants and professionals - of which £1.5m has so far been received.
"My own view is that that is not a mistake - there were no sanctions on dealing with the Libyan regime, many many companies and organisations in this country dealt with them," he said.
"I think that to say that we will not train officials in developing countries, because of things their regimes might or might not do, I think is very curious," he added.
Sir Howard told the BBC that he first offered his resignation on Sunday, but was asked to withdraw it.
"The more I have thought about it - and one has to reflect and ask one's conscience - the more I thought about it, there were these two things which I found hard to defend," he said.
"I think the school will recover, but I decided it would recover more quickly if I accepted responsibility for those two errors of judgement. The LSE is a fine and important British institution."
The LSE students' union, which had occupied Sir Howard's office in protest at the Libyan links, said his resignation was "the first step in restoring our faith in the integrity of the university".
The institution has said it will offer the equivalent of the £300,000 donation in scholarships for North African students.
But Ashok Kumar, the students' union's education officer, said the union is also calling for the £1.5m received for training civil servants to also be "returned to the Libyan people" in the form of scholarships.
However, one academic has said the row is being blown out of proportion.
Colin Talbot is a professor at Manchester Business School, who also taught on one of the LSE courses in Libya. He thinks Sir Howard has been the victim of double standards.
"We have some British arms companies who have been selling arms to the Libyan regime," he said.
"We've had BP there, drilling for oil. Nobody has been calling for the chief executive of BP to stand down as a result of that, whereas the LSE, which has been involved in some fairly minor education and research activities, is going through this trauma."
Sir Howard will remain as the head of the LSE until a successor has been found.
Peter Sutherland, chairman of the LSE's court of governors, said Sir Howard had been an "outstanding" director over the past eight years.
"We accept his resignation with great regret and reluctance but understand that he has taken an honourable course in the best interests of the school," he said.
The LSE has already announced it is investigating claims that Saif Gaddafi plagiarised his PhD thesis, which was awarded in 2008.
Labour peer Lord Desai, who was one of the external examiners for the thesis, told the BBC that Saif Gaddafi had been "rigorously examined" and that the degree was awarded before his donation to the university was made.
The Libyan leader's son studied at the LSE, gaining both an MSc and PhD.