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LONDON—The resignation of a U.K. government minister citing differences over economic policy has exposed fresh divisions within Prime Minister David Cameron's ruling Conservative Party already split over membership of the European Union.

Iain Duncan Smith, one of a handful of ministers who broke ranks with the prime minister to campaign for so-called Brexit ahead of June's national EU referendum, announced in a letter late on Friday that he was stepping down as work and pensions minister because he believed the government's plans to cut state support for disabled people weren't defensible.

Mr. Duncan Smith, a former leader of the Conservative party who had been in his post since 2010, challenged the economic stewardship of Treasury chief George Osborne, a close political ally of Mr. Cameron. Mr. Osborne is also seen as a key contender to challenge for the leadership of the party when the prime minister steps down before the next national elections due in 2020.

The disagreement about economic policy comes as the Conservative party grapples with deep divisions over the country's membership of the EU. Mr. Cameron and Mr. Osborne favor EU membership on economic and security grounds, while Mr. Duncan Smith is among a group of six senior ministers who are campaigning for Britain's withdrawal from the bloc. The party as a whole is divided, with about a third of its 330 lawmakers thought to be in favor of leaving the bloc while the rest are either in favor of staying in or are undecided.

In his first television interview since his bombshell announcement on Friday, Mr. Duncan Smith on Sunday told the British Broadcasting Corp. that he had quit because he was losing his ability to influence the government's austerity drive to shrink the budget deficit which he felt was targeting less-wealthy sections of the population that he wanted to help.

He denied his resignation was a personal attack on Mr. Osborne or Mr. Cameron or that it had anything to do with his stance on the EU, but said there should be more collegiate decision-making in government. Mr. Duncan Smith said he had considered resigning last year over cuts to welfare, the area of spending his department is responsible for but has been targeted by Mr. Osborne's austerity measures.

"Yes we need to get the deficit down, but we need to make sure we widen the scope of where we look to get that deficit down and not just narrow it down on working-age benefits," he said.

Mr. Cameron's office responded on Sunday saying the government was sorry to see Mr. Duncan Smith go but it was determined to continue its work to try and help Britons have more security and opportunity, including the most disadvantaged.

"That means we will deliver our manifesto commitments to make the welfare system fairer, cut taxes and ensure we have a stable economy by controlling welfare spending and living within our means," a government spokesman said in a statement.

In his resignation letter, Mr. Duncan Smith singled out Mr. Osborne's plans announced in his annual budget on Wednesday to make savings of £ 4.4 billion ($6.4 billion) over the next five fiscal years in welfare support for disabled people.

Other Conservative lawmakers had also urged Mr. Osborne to reverse the disability benefit cuts and on Friday the government confirmed it would rethink the plans. The reversal has raised questions about Mr. Osborne's judgment after he scrapped other plans to cut welfare payments in November following similar opposition from lawmakers in his own parliament and the opposition Labour Party.

Labour and the Liberal Democrats, the smaller centrist party that was in coalition with the Conservatives between 2010 and 2015, both urged Mr. Osborne to resign on Friday after Mr. Duncan Smith quit.

"The Conservative Party is tearing itself apart over an unfair Budget," Owen Smith, Labour's spokesman for work and pensions, said in a statement on Sunday.

In his response to the resignation letter, Mr. Cameron said Mr. Duncan Smith had agreed to the plans to cut disability welfare payments along with his office and the Treasury. He confirmed the government wouldn't proceed with the disability payment cuts and would work over the coming months, "to get these policies right."

"In the light of this, I am puzzled and disappointed that you have chosen to resign," the prime minister said.

A person with knowledge of the situation in government said on Saturday that the prime minister retained full confidence in Mr. Osborne and added that while splits in the Conservative party over Europe were well documented, "I would refute the suggestion that there are huge splits on austerity."

"We had a clear austerity strategy which got us re-elected with a majority," he said, referring to the party's victory in last May's national elections.

Write to Nicholas Winning at nick.winning@wsj.com

(END) Dow Jones Newswires

March 20, 2016 21:45 ET (01:45 GMT)

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