A Labour peer and former policy adviser to Jack Straw has resigned the party whip because the transport secretary, Stephen Byers, "played chicken" over his appointment to head the audit commission, the main body that scrutinises value for money in local government and the NHS.

Lord Warner told the Guardian he had decided to leave the party and become a crossbench peer in protest at Stephen Byers' handling of his appointment - after he vetoed it following protests from the English and Welsh local government association.

The row over Mr Byers' handling of the audit commission job is the latest headache for the trouble prone minister. He has already lost his special adviser, Jo Moore, and his head of communications, Martin Sixsmith, in a row that caused much embarrassment for his department.

Now Lord Warner - who had a distinguished career in local government before advising then home secretary Jack Straw - is furious that Mr Byers intervened when the appointment had already been agreed with his junior minister, Nick Raynsford, and approved by Downing Street.

Lord Warner had originally applied for the 1 day a week job last October. He was unanimously chosen by an independent panel as the best person for the £36,000 post. He had also informed the panel that he would suspend his membership of the Labour party if he got the job, to counter any suggestion that he was one of "Tony's cronies".

He has now decided to quit altogether after the way he was treated by the minister.

He said yesterday: "Basically I left to go on holiday at the beginning of February just after I was asked to go to No 10 to discuss the press release of my appointment with Nick Raynsford. When I came back I found that Stephen Byers had intervened and decided, because there had been objections from the local government association, that I was not going to be appointed.

"This seems to be the first time the people being regulated were being allowed to veto the regulator. In my view Stephen Byers has played chicken over my appointment and given in to pressure. I also found that the NHS confederation had 'warmly welcomed' my appointment while there had been no objections from the TUC or the CBI."

The view of the ministry is that Mr Byers had a right to block the appointment as he had to consult all the main bodies involved and feared Lord Warner's appointment would be seen as an example of cronyism by Labour.