Nick Smith made an emotional announcement in parliament, admitting to his ''error of judgement'' with regards to the letters and not declaring a conflict of interest.
He was minister for climate change, environment and local government.
He said Prime Minister John Key had ''quite properly'' accepted his resignation, New Zealand media say.
''Dr Smith has been a hard-working and diligent minister, but perceptions do matter and he knows he has let himself down,'' Mr Key said in a statement.
Mr Smith has been under pressure to resign since it was revealed that he was involved in the claim of his friend Bronwyn Pullar for a cycling accident while he was overseeing the country's accident compensation.
He said he did not want to comment on the nature of the relationship between him and Ms Pullar, a political activist.
''I have a wonderful wife and family who are actually very distressed today, that I have been absolutely loyal to my wonderful wife and I will be to the end of my days,'' he was quoted as saying in New Zealand media.
Mr Smith told parliament that he wrote a letter on the ministerial letterhead for Ms Pullar, and signed another letter related to her case without declaring his conflict of interest.
He also apologised to the PM, his caucus, family and staff, saying that he intended to serve out his term in parliament.
Mr Smith is one of several ministers in Mr Key's government to lose their portfolios over allegations of misconduct, report New Zealand media.
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