“Members of an elected official’s staff should never distract from the work of the principal who they are privileged to serve,” chief of staff Charles O’Byrne wrote in a letter to Paterson. “It is clear to me that my personal history has become a distraction to the work of your administration.”

Paterson wrote O’Byrne that he accepts the resignation, effective Friday, with regret.

O’Byrne, who has ties to the Kennedy family, has said clinical depression kept him from paying taxes between 2001 and 2005, before he took the job as secretary to the governor.

O’Byrne’s problems were first made public in the New York Post on Saturday and O’Byrne has been fighting mounting pressure since then to keep his $178,500-a-year job. On Tuesday, lawyers for O’Byrne sought to end the controversy by releasing tax data but ended up intensifying the criticism when they blamed the delay on “nonfiler syndrome” related to his depression. One of the tax attorneys said it was a common mental health problem for professionals, but mental health and IRS officials said they never heard of it.

Paterson administration officials didn’t immediately respond to requests for comment.

O’Byrne, a former Jesuit priest who officiated at the wedding of John F. Kennedy Jr. and counseled the Kennedy family three years later after he died in a plane crash, was officially the secretary to the governor, but his duties included those of chief of staff. He was responsible for mapping out policy and politics as Paterson rose from the near powerless Democratic minority in the Senate to lieutenant governor and then governor after Democrat Eliot Spitzer resigned in March amid a prostitution scandal.

O’Byrne’s resignation is a blow to an administration that has fought one crisis after another, beginning with Spitzer’s resignation after just 14 months, much of which was spent in gridlock after fights with the Republican-led state Senate.

Since then, Paterson, with O’Byrne, has convinced the Legislature to cut Spitzer’s last budget, decreased spending in the executive branch by 10 percent and warned of dire fiscal problems months before Wall Street’s meltdown.

Paterson appointed veteran political staffer and adviser Bill Cunningham as acting secretary to the governor.

Now, O’Byrne’s failure to pay $200,000 in taxes has become a liability to a governor who wants to run for a full term in 2010 and is struggling to keep the state from slipping into economic bedlam.

It matters little at this point that O’Byrne, 49, repaid his debt plus penalties – with help from the Kennedy family – for failing to pay state and federal taxes from 2001 to 2005, a lapse he blames on clinical depression.

Sympathy for a tax delinquent pulling down $178,500 a year is scarce when the governor is warning of fallout from the Wall Street meltdown and while his tax department threatens felonies for tax scofflaws.

“I think any situation he finds himself in he tries to rise to the occasion,” said Stephen Smith Jr., whose mother Jean Kennedy Smith is the sister of John F. Kennedy and Sen. Edward Kennedy. “I feel badly for him right now because he, like all of us, are vulnerable in certain ways. And New York is a tough town.”

Smith has been friends with O’Byrne, 49, since their Columbia Law School days, a friendship that drew O’Byrne into the family. O’Byrne officiated at John F. Kennedy Jr.’s 1996 wedding to Carolyn Bessette and counseled the family three years later after the Kennedy scion, his wife and her sister died in a plane crash.

“I think Charles played a really important role in helping everybody to heal,” Smith told The Associated Press.

O’Byrne also counseled the Kennedy family during the 1991 rape trial of his law school friend’s brother, William Kennedy Smith, who was acquitted. He has served as a trustee of three Smith/Kennedy family trusts, receiving at least $1,000 annually in income.

O’Byrne said he paid off his tax debt through lines of credit, liquidating assets and help from relatives and friends. Jean Kennedy Smith has loaned O’Byrne at least $5,000 and she and her daughter, Kym Smith, gave him gifts worth at least $1,000 last year, according to state financial disclosure forms.

Stephen Smith Jr. described O’Byrne as a committed friend.

Smith once persuaded O’Byrne to take a leisurely walk in the woods on an unseasonably warm November day. Three hours later, they were on top of a New Hampshire mountain Smith just had to climb, shivering in shorts in driving snow and sharing half a peanut butter sandwich.

“That’s what he’ll do for a friend,” Smith said.

For four days, since the New York Post portrayed O’Byrne as an ex-deadbeat whose excuse was, according to the front-page headline, “HE’S CRAZY,” Paterson has defended O’Byrne.

“There are a lot of situations where people as individuals have had things in their lives and they’ve gone back and they’ve addressed them,” said Paterson. “And the question then becomes, should a person who has had the problems be allowed to serve in government? In this case, I think the person should be.”

But in New York politics, after a harrowing 14 months of the promise and plummet of Eliot Spitzer, the hell-bent reformer taken down in a prostitution investigation and replaced by Paterson, a good scandal isn’t wasted.

Enter the Republican party trying to hold the its last bastion of power – the state Senate – where they cling to a one-vote majority. This week, three Republican Senate candidates called for O’Byrne’s resignation and the Republican-led investigations committee that put Spitzer on the public rack for a year turned to O’Byrne.

It’s an odd spot for O’Byrne, a guy who says his Catholic faith steered him to a life of public service, who took a dicey flight to Nicaragua to bring in medical supplies during the Reagan administration’s embargo, and who volunteered to help disabled kids and homeless adults on his way to the priesthood.

That’s the puzzle of O’Byrne: nice guy but just don’t get in his way. Some have witnessed the wrath of the ex-priest built like a barroom brawler up close.

“He was infuriated, he was screaming,” a former Spitzer aide said of a blowup in the Executive Chamber that many around O’Byrne say are rare. “He was staunchly defending David … but he came around two days later and apologized and everything was fine after.”

In a Playboy article in 2002, the year he left the priesthood after four years, O’Byrne blasted what he called hypocrisy in the church, referring to some gay priests as “boyologists.”

“I became aware that there was sex all around me,” he wrote. “One of my best friends, a virgin at 30, was surprised when his superior encouraged him to respond to the sexual overtures of an older Jesuit.”

O’Byrne’s edge is a counterweight to the likable Paterson in a place ruled by outrage and outsized egos. The line is that Paterson is like a game of telephone. He can give three people the same message and all three will have heard something different, and all three will think they won.

Then O’Byrne straightens them out.

Paterson and O’Byrne met when O’Byrne signed on as a part-time speech writer for Paterson, then the Senate minority leader. The two clicked, and Paterson went from a near backbencher to the governor’s mansion in the ashes of the Spitzer administration.

With O’Byrne’s guidance, Paterson has started to cut a national swath, warning the sky was falling on Wall Street months before it fell, expanding gay rights, and calling for a cap of the nation’s highest property taxes.

Just off stage was O’Byrne. But for how long isn’t certain.

It’s embarrassing and bad timing, but not fatal, said Maurice Carroll, director of the Quinnipiac University Polling Institute and a longtime New York political reporter. This time, he said, it’s Paterson who’s protecting O’Byrne.

“Any negative hurts, but will it hurt in the long run? No. Because no one can imagine Paterson being part of anything like this.”