The decision by Malcolm Rifkind, a former foreign minister, is embarrassing for Cameron's Conservatives less than three months before a neck-and-neck national election, but they hope its decisiveness and speed will draw a line under the affair.
Rifkind, whose committee oversees the work of Britain's intelligence services, was secretly filmed offering his services for cash to a fake Chinese company, boasting he had "useful" access to foreign ambassadors.
Jack Straw, a senior lawmaker from the opposition Labour Party, was caught in the same media sting, which revived memories of a similar 2010 episode when former ministers were recorded saying they could influence government policy for cash.
There was no suggestion that either Rifkind or Straw had done anything illegal. But with memories still fresh of a 2009 scandal which saw lawmakers' exaggerated expense claims dominate the media, the incident feeds the view that politicians are more interested in making money than serving the public.
Voter disenchantment with Britain's main political parties is already boosting anti-establishment rivals.
Rifkind, who denies wrongdoing, had planned to stand for re-election on May 7 in a safe Conservative seat in London, but said the imbroglio had made him change his mind.
"I have concluded that to end the uncertainty it would be preferable, instead, to step down at the end of this parliament," he said in a statement.
"As regards the allegations ... I find them contemptible and will not comment further at this time."
Rifkind said he would also be standing down with immediate effect from the chairmanship of parliament's Intelligence and Security Committee, which scrutinises the work of the country's three intelligence services and gives him access to sensitive information concerning national security.
Adding to perceptions that some lawmakers are out of touch with the public, Rifkind had argued recently that parliamentarians must be able to supplement their income, already twice the average national wage, to attract the right calibre of person to the job.
Rifkind said he planned to continue his public and political life after leaving parliament.
Straw, the Labour politician, had said more than a year ago that he would stand down at the May election. (Addditional reporting by Kylie MacLellan; Editing by Stephen Addison and Louise Ireland)
