Opposition Labor party Senator Sam Dastyari announced his resignation early Tuesday morning after weeks of pressure, saying he wanted to spare his party further distraction.
"I have always honored my parliamentary oath, I've always acted with integrity and I remain a loyal patriotic Australian," Dastyari told reporters as he announced his resignation.
The Dastyari controversy prompted the introduction of new security laws last week, including a complete ban on foreigners donating to Australian political parties.
"Foreign powers are making unprecedented and increasingly sophisticated attempts to influence the political process, both here and abroad," Prime Minister Malcolm Turnbull said.
Chinese officials reacted furiously to suggestions Beijing was meddling in Australian affairs.
"We are shocked by the Australian leader's remarks which are lack of principle and simply pander to those irresponsible reports by some Australian media," Foreign ministry spokesman Geng Shuang said on December 8.
"Imbued with bias towards China, these groundless and unfounded remarks can sabotage China-Australia relations and are detrimental to the foundation of mutual trust and cooperation. We are strongly dissatisfied with those remarks and has lodged stern representations with the Australian side," added Geng.
Dastyari had been accused previously of being too close to Chinese donors, but the latest controversy was sparked on November 29 when Fairfax Media revealed the senator had warned wealthy Chinese Australian businessman, Huang Xiangmo, that his phone may have been tapped by Australian intelligence agencies.
The same day, a new recording of a 2016 press conference was released by the Australian Broadcasting Commission, in which Dastyari defended China's position in the South China Sea.
"The Chinese integrity of its borders is a matter for China," he told the gathering. "And the role that Australia should playing as a friend is to know that with the several thousand years of history ... where it is and isn't our place to be involved."
Australia has largely stayed neutral in the South China Sea dispute, and has regularly called for all nations to abide by international laws to ensure freedom of navigation and trade in the disputed waters.
According to documents first reported by the ABC,
Huang has given hundreds of thousands of dollars to Australia's two main political parties.
In 2015, he donated $55,000 to have a "boardroom lunch" with Opposition Labor Party leader Bill Shorten.
A spokesman for Huang told the ABC the businessman had stopped making donations in 2016 and would not be commenting on the stories. CNN has reached out to Huang's company Yuhu Group for comment.
People's Daily: Reports 'reek of racism'
It isn't the first time questions have been raised over China's influence inside Australia. In November, an Australian professor said his book on Beijing's growing power inside Canberra was dumped due to fears of a Chinese backlash.
At a press conference following Senator Dastyari's resignation, Shorten said he supported tightening restrictions and disclosures around political donations.
Peter van Onselen, professor of politics at the University of Western Australia, wrote for CNN on December 5 Australia had been exposed to foreign interference
through donations for years.
"Australia has a long history of large political donations from abroad, including hefty payments to the current government," he said.
In an editorial in the official newspaper of the Chinese Communist Party
, People's Daily, the state media outlet blamed the allegations of interference by Beijing on a "biased" Australian media.
"This paranoia that reeks of racism tarnishes Australia's image as a multicultural society," the report said.
"The truth is it is a mirror that exposes the ridiculousness of Australian media, who blow up the 'China threat theory' ... It is advised that the Australian government and media, when dealing with China, that they uphold the principle of truth, reject political prejudices and paranoia."