John Healey’s dramatic resignation has stunned Westminster – but it did not come out of a clear blue sky.

Storm clouds were gathering over the Ministry of Defence 24 hours earlier when the former defence secretary had what friends describe as a ‘stand-up row’ with Rachel Reeves.

The Chancellor told him bluntly that she would not sign up to his demand that defence spending should rise to three per cent of GDP by the end of the decade.

And she warned him that, after months of wrangling, he would effectively be offered just £10billion to shore up Britain’s defences – barely a third of the £28billion deemed necessary.

Mr Healey, who was due to be unveiling the first elements of the plan on Friday morning, was appalled.

He told Keir Starmer that the Treasury’s position was unacceptable and urged him to intervene.

After a night’s deliberation and tense talks with Ms Reeves, the PM rang Mr Healey on Thursday morning to say he was siding with the Chancellor. Sir Keir invited him in to discuss the situation face to face, arguing that the cash injection would still amount to the largest for years.

Mr Healey took the PM’s call while he was travelling to Gosport for an event with his Australian counterpart Richard Marles. He declined the invitation for a further discussion with the PM and tendered his resignation with immediate effect.

‘John was at the end of his tether,’ said one friend. ‘This isn’t some leadership bid – he is genuinely not interested in that. This is a guy who is a patriot first and who is not willing to defend a settlement that sells the country short.

‘Rachel has behaved appallingly. If anyone should go, it’s her. The fact that the PM is unwilling to stand up to her – and stand up for what’s right – on a matter of national security says it all about his premiership.’

Mr Healey’s departure caps a chaotic week for the government and has left even allies of the PM questioning how long he can survive.

One government source said: ‘This whole process has been like a microcosm of Keir’s approach – all the problems of indecision and lack of authority have been on full display. If he can’t even face down Ed Miliband over defence, then what is the point of him?’

Matters could yet get worse. The Chief of the Defence Staff, General Sir Richard Knighton has also written privately to the PM in recent days. While the contents of Sir Richard’s letter remain a tightly kept secret, he is thought to have left open the possibility that he might resign if the funding settlement is indefensible.

One Government source said Sir Richard is on ‘resignation watch’.

The crisis that led to Mr Healey’s departure is the final culmination of a slow-motion car-crash that has paralysed Sir Keir for months.

Labour’s strategic defence review was published last June – so long ago that some military experts believe it is in need of an update before the government has even begun to implement it.

In the intervening period, Ms Reeves has found £3billion a year to scrap the two-child benefit cap, but has dug her heels in over defence.

Mr Healey pledged that the Defence Investment Plan, which would provide the funding for the new strategy, would be published by the autumn.

But, as Christmas came and went, the briefings and counter-briefings began to emerge about a stand-off between Mr Healey and a Chancellor who has told friends that the MoD budget is a ‘money pit’.

Appearing before the Commons liaison committee in February, Sir Keir told MPs: ‘What I am not going to do is put out a plan when I cannot explain exactly how it will be funded. We are finalising that; we are nearly there. It is my job to resolve it, and resolve it I will.’

Four months later, and with a crunch Nato summit approaching in early July, he had still not resolved it, despite saying repeatedly that his ‘first duty’ as PM is the defence of the nation.

The crisis centred on the realisation last December that the MoD is £28billion short of the money needed to fund the defence review. Ms Reeves said the figure was simply unaffordable and Sir Keir attempted to broker a ‘compromise’ of £18billion.

But in recent weeks the Chancellor has chiselled this down to £15billion, arguing that the war in Iran means there is less money available, while – incredibly – ignoring the fact it has also made the world more dangerous.

At the end of last week, she reluctantly launched a raid on other Whitehall departments to try and find the money.

Ed Miliband refused to agree to the raid – and neither the PM nor Ms Reeves were willing to face him down, with the result that Mr Healey was then offered just £13.5billion. The Chancellor also informed him the MoD would have to find £3.5billion of ‘efficiency savings’ itself – taking the new money available down to just £10billion over four years.

In an extraordinary briefing, the Treasury claimed Mr Healey had been demanding huge cuts to front line services.

‘Let's be clear on what John is asking for: cuts to schools and hospitals,’ said one source.

A friend of Mr Healey responded furiously, saying: ‘It is so juvenile. Rachel is trying to curry favour with the Left in the hope of keeping her job.

‘It is desperate stuff and the PM is letting her do. The only way he can save himself now is to sack her.’

The PM’s failure to grip the situation now threatens to hasten his end. He had hoped to secure a legacy of sorts by becoming the PM who finally reversed years of military decline.

Instead, he risks being damned by Mr Healey’s parting words: ‘You have been unable, and the Treasury has been unwilling, to commit the resources that the nation needs to defend the country at this time of rising threats.’