A man some considered one of the dodgiest politicians in New South Wales has resigned.

Bending to heavy public pressure, Jeff McCloy has given up his spot as Lord Mayor of Newcastle.

McCloy resisted resignation for days after his colleagues indentified him as a source of corrupt campaign funds.

The Independent Commission Against Corruption (ICAC) inquiry in NSW has heard that McCloy was responsible for handing out money from developers, who sought to bolster the banks of Liberal Party candidates.

In one instance, an LNP candidate said he had been called to meet with McCloy in the back seat of his Bentley, where the Lord Mayor of Newcastle at the time handed him a paper envelope containing $10,000.

The MP told the commission Mr McCloy said; “I should be giving this to the Salvation Army.”

As heads continue to roll, NSW Liberal Party director Tony Nutt has issued an apology on behalf of the party.

He says the revelations “disgusted the honest, law-abiding parliamentarians, elected office bearers, members, donors and supporters of the Liberal Party”.

“As an act of atonement, the Liberal Party will not contest the Newcastle and Charlestown by-elections.”

NSW Deputy Opposition Leader Linda Burney says staying out of the seats is an “astounding” decision.

“That is not an act of atonement, that is putting up the white flag and saying; ‘We know we are going to lose these by-elections because people are so furious with the way in which their trust has been abused’,” she said on the weekend.

But party lines are weakest when pandering to developers, it seems.

Ms Burney has acknowledged the ICAC inquiry may bring more damning revelations about her own party, after the Opposition Leader's chief of staff, Ian McNamara, was named in the opening hearing as a person behind a smear campaign against his own Labor colleague.

There are claims that Mr McNamara sought to bring down his colleague, Labor MP Jodi McKay, after she declined donations from developer Nathan Tinkler and would not support his proposed coal loader project.