Mr Johnson ordered the investigation into claims staff broke lockdown rules and told MPs he was furious about leaked footage apparently showing aides joking about it.
The prime minister apologised unreservedly for the offence caused by the footage of Allegra Stratton, his spokeswoman at the time, conducting a mock press conference.
Ms Stratton was in tears as she announced her resignation, apologising to people who have made “immense sacrifices” and said she would “regret those remarks for the rest of my days".
The film came to light on Tuesday night and showed Ms Stratton laughing as she appeared to rehearse answers to questions about the festive gathering.
The video obtained by ITV News, reportedly from December 22 last year, refers to a party on “Friday” — which would have been December 18, the day it is claimed there was a staff party, where games were played, food and drinks were served, and revelry went on past midnight.
Ed Oldfield, Mr Johnson's special adviser, can be heard asking Ms Stratton: “I’ve just seen reports on Twitter that there was a Downing Street Christmas party on Friday night. Do you recognise those reports?”
Ms Stratton replied that she had gone home before appearing to consider what the correct answer should be.
During the rehearsal, filmed as part of a subsequently abandoned plan for Ms Stratton to lead televised press briefings, one aide is heard saying: “It wasn’t a party, it was cheese and wine.”
“Is cheese and wine all right? It was a business meeting,” Ms Stratton replied, to laughter in the room.
“This fictional party was a business meeting … and it was not socially distanced,” she said.
Announcing her resignation outside her London home, Ms Stratton said: “The British people have made immense sacrifices in the battle against Covid-19. I now fear that my comments have become a distraction from that fight.
“My remarks seemed to make light of the rules, rules that people were doing everything to obey. That was never my intention.
“I will regret those remarks for the rest of my days and offer my profound apologies to all of you for them.
“To all of you who lost loved ones, endured intolerable loneliness and struggled with your businesses – I am truly sorry, and this afternoon I am offering my resignation to the prime minister.”
Earlier on Wednesday, Mr Johnson told the UK Parliament: “I understand and share the anger up and down the country at seeing No 10 staff seeming to make light of lockdown measures and I can understand how infuriating it must be to think that people who have been setting the rules have not been following the rules because I was also furious to see that clip.
“I apologise unreservedly for the offence that it has caused up and down the country and I apologise for the impression that it gives.”
The prime minister said “disciplinary action” would be taken against staff if needed, as he face accusations of being caught “red-handed”.
He had earlier faced intense calls to “come clean” about the alleged Christmas party.
Mr Johnson had repeatedly refused to answer questions on whether a gathering was held, only saying “guidelines were followed at all times".
At the Prime Minister's Questions session on Wednesday, Labour leader Sir Keir Starmer said Mr Johnson’s apology “raises more questions than answers”.
“The prime minister, the government, spent the week telling the British public there was no party. All guidance was followed completely,” the Labour leader said.
“Millions of people now think the prime minister was taking them for fools, that they were lied to. They are right, aren’t they?”
He highlighted the leadership of the queen during the pandemic as he questioned if Mr Johnson had the “moral authority” to lead and ask people to abide by any further restrictions.
“Her Majesty the Queen sat alone when she marked the passing of the man she’d been married to for 73 years. Leadership, sacrifice – that’s what gives leaders the moral authority to lead,” he said.
“Does the prime minister think he has the moral authority to lead and to ask the British people to stick to the rules?”
Earlier, he had called on Mr Johnson to “come clean and apologise” and said that for aides “to lie and to laugh about those lies is shameful”.
Labour’s Rosena Allin-Khan, a practising doctor, questioned how the prime minister slept at night as she recalled weeping behind her mask while working in intensive care.
Dr Allin-Khan said the country is “angry” before adding: “Last Christmas while we were in lockdown, millions of people were unable to be with their families, thousands of people waved through their care home windows at loved ones wishing them a Merry Christmas from the side of the road, people died without that last touch from their daughters, their sons, their wives.
“Working in intensive care, I wept behind my mask as three children talking to their dying mother on an iPad begged her to wake up. Countless children now growing up without parents while parties were held at No 10.
“This is disgraceful, this is an insult to everyone who followed the rules, it is an insult to everyone who wasn’t allowed to say their final goodbye.”
Amid a backlash against the government, Health Secretary Sajid Javid and Vaccines Minister Maggie Throup pulled out of a round of television and radio interviews on Wednesday morning. Mr Javid previously said “whatever would have happened in No 10, all rules would have been followed at all times”.
Hours after the cancelled media appearances, Foreign Secretary Liz Truss became the first UK Cabinet minister to break the radio silence from No 10 to address the allegations.
She said it was in “everybody’s interests that we follow the Covid rules” but declined to say if the gathering had taken place.
Baroness Sayeeda Warsi, a former Conservative government minister, called for everyone who attended the party, including any ministers, to resign from their posts.
“No ifs, no buts,” she said.
She said if the rule of law is “trashed by those in power, the very essence of our democracy is at stake”. It would be “very dangerous territory”, she said, for the UK government to allow lockdown breaches behind closed doors without consequences.
“Those that make the law must obey the law,” she wrote on Twitter. “If consequences do not follow a breach of the law by lawmakers, we send a green light to the public that laws and rules don’t matter. This is dangerous territory for us as a nation.”
Conservative MP Sir Roger Gale said he would accept there was no gathering only when Mr Johnson says “point-blank that there was no party”.
“To deliberately mislead the House [of Commons], if that turned out to be the case, would be a resignation matter,” Sir Roger told Sky News.
The leaked footage was shot in the media room at No 9 Downing Street, which was refurbished at a cost of £2.6 million ($3.4m) in preparation for the televised broadcasts before the plan was ditched.
Police are not opening an investigation into the Downing Street party allegations.
Scotland Yard said officers will not “commence an investigation at this time” in line with its “policy not to investigate retrospective breaches” of coronavirus rules despite reviewing the allegations and leaked footage showing senior No 10 staff joking about a party.
“There was no Christmas party. Covid rules have been followed at all times,” a Downing Street spokesman said in response to ITV’s report.
The Times reported that dozens of staff wore festive jumpers and were asked to bring “Secret Santa” gifts but the prime minister had insisted no rules were broken.
They were reported to have brought alcohol and food to the event at a time when London was in Tier 3 restrictions banning social mixing indoors.
Mr Johnson’s official spokesman had insisted “there was not a party”, but during a visit to a prison on Tuesday, the prime minister refused to describe the event.
“What I can tell you is that all the guidelines were observed, continue to be observed,” he said.
Ministers have yet to explain how the alleged party complied with the rules in place at the time, despite coming under pressure since an initial report in the Daily Mirror.
The newspaper said two events took place in No 10 in the run-up to the festive season last year, including Mr Johnson giving a speech at a leaving function during lockdown in November.
The other was said to be the staff party in December. At the time, Tier 3 rules banned work Christmas lunches and parties, where it was “a primarily social activity and is not otherwise permitted”.
Matthew Taylor, chief executive of the National Health Service Confederation, which represents NHS trusts, said the reported party served as a “blow to morale” among those working in health care.
Asked whether the story matters to people running the NHS, Mr Taylor told BBC Radio 4’s Today programme: “In any difficult situation, we all need to feel that we’re pulling together, that we’re a part of an effort and if it feels as though people have not been playing by the rules, if it feels as though powerful people are not playing by the rules, then there is a blow to morale, it does make it harder to get people to follow the advice. So, no, it really isn’t what we need at the moment.”
A front-line NHS healthcare worker who was prevented from visiting her mother in hospital due to Covid-19 restrictions said she felt sick watching the video. The woman, who wished to remain anonymous, told the PA news agency: “To say I’m angry … I’m incandescent. It’s the disrespect, it’s the one rule for us and another rule for them, that’s what’s the worst.
“I see Allegra Stratton laughing up there and I feel sick, I feel disrespected, [like] I’ve been taken for a mug.
“I can’t put enough words together right now as to how appalling that behaviour is. It should have consequences.”
Mr Starmer said: “People across the country followed the rules even when that meant being separated from their families, locked down and – tragically for many – unable to say goodbye to their loved ones.
“They had a right to expect that the government was doing the same. To lie and to laugh about those lies is shameful.
“The prime minister now needs to come clean and apologise. It cannot be one rule for the Conservatives and another for everyone else.”
Sir Charles Walker, a Conservative MP, said the government could find it “almost impossible” to introduce “very proscriptive” Covid-19 restrictions after the leaked footage was broadcast.
“I think now that, going forward, any measures will be advisory,” he told Times Radio. “I think it would be very difficult to enshrine them in law and then once again ask our poor police forces to enforce them.”
The Department for Education has admitted it held a social gathering of staff earlier in the lead-up to Christmas in contravention to coronavirus social-distancing rules.
The Daily Mirror reported that former education secretary Gavin Williamson threw a party and delivered a short speech at the event, which took place on December 10 while London was in Tier 2, banning social mixing between households.
“The gathering was used to thank those staff for their efforts during the pandemic,” said a department spokeswoman.
“Drinks and snacks were brought by those attending and no outside guests or supporting staff were invited or present.
“While this was work-related, looking back we accept it would have been better not to have gathered in this way at that particular time.”
Last week, the government confirmed it will hold Christmas parties for staff despite the rising Omicron cases. Conservative Party Chairman Oliver Dowden urged people in Britain to “keep calm and carry on with your Christmas plans".