The chief inspector of probation, Paul McDowell, has resigned over a conflict of interest row after his wife’s private justice company won the largest number of contracts to run probation services in England and Wales.

McDowell, who was appointed by the justice secretary, Chris Grayling, said he was resigning from the £135,000-a-year watchdog role because although there were “measures in place to manage any conflicts of interest” it was clearly seen as a conflict of interest.

“It is imperative that any inspectorate is independent and seen to be so,” he said. “Although we have measures in place to manage any conflicts of interest, and I would always carry out my duties without fear or favour, it is clear that a perception of conflict around my post remains. It is therefore right that I resign.”

Grayling said he had considered “all of the potential mechanisms and systems that could be introduced and used to manage any actual or perceived conflict of interest. However Mr McDowell has decided that, in the circumstances, he will resign.”

The resignation follows the disclosure by the Guardian that McDowell’s wife, Janine, was managing director of Sodexo Justice Services, which was named as preferred bidder to supervise tens of thousands of offenders in six of the 21 probation areas in England and Wales. Sodexo took over the contracts on Sunday in partnership with Nacro, the crime reduction charity, of which McDowell was the former chief executive.

The justice secretary paid tribute to McDowell, acknowledging his “assured leadership and the grounded independence” of his inspection work. “I regret that circumstances have changed and are now such that we have reached this position,” Grayling said.

“At the time of his appointment Mr McDowell’s position was fully reasonable and the appropriate pre-appointment processes in place at that time were properly followed.”

The resignation of the chief inspector of probation follows an announcement in December that Grayling would not be renewing the contract of the chief inspector of prisons, Nick Hardwick, amid speculation that he was too critical for the justice secretary.

McDowell’s resignation triggered a sharp attack on Grayling by the shadow justice secretary, Sadiq Khan: “Not content with sacking the chief inspector of prisons, the chief inspector of probation has now resigned over conflicts of interest the justice secretary was fully aware of at the time he appointed him. A chief inspector needs to be able to do the job without fear or favour, without any hint of bias, perceived or otherwise,” said Khan.

He said Labour had warned the government that McDowell’s position as chief inspector of probation appeared compromised through links to private companies picking up one-third of the privatised probation service.

“It is shocking that McDowell’s departure has been delayed until the day after private companies take over the running of probation. When probation is undergoing the biggest upheaval in its history and dedicated staff are demoralised because of the government’s reckless privatisation, this is the time when a strong, independent chief inspector is needed the most as the guardian of the public’s safety. The justice secretary needs to urgently explain his role in this fiasco and how these multibillion contracts will be inspected and supervised without a chief inspector.”

The justice select committee has also questioned McDowell’s position after the Guardian disclosure and the failure of Grayling to disclose the potential conflict of interest at the time of his appointment in November 2013. He took up the post in February 2014.

Sir Alan Beith, the chairman of the justice select committee, raised a particular concern that his committee was not told of Janine McDowell’s leading role in Sodexo Justice Services when they endorsed his appointment at chief inspector of probation in the autumn of 2013.

When the Guardian disclosed the conflict of interest, McDowell responded by insisting that it could be “managed appropriately” within existing Whitehall rules.

“My wife and I do not discuss issues which it is inappropriate for us to discuss. We are very aware of what is appropriate and what is not,” he interrupted a holiday to tell the Guardian. “We have acted with absolute integrity and professionalism … I will not be got at by anybody.”

The justice secretary said the justice select committee would be involved in appointing McDowell’s successor “in the usual way”.

The announcement came the day after contracts to managing probation services involving the supervision of 200,000 ‘medium- to low-risk’ offenders were handed over to 21 community rehabilitation companies. A small rump national public sector probation service is now left to manage the remaining 30% of offenders assessed as high risk.

The Sodexo/Nacro partnership is now responsible for probation services in South Yorkshire, Essex, Northumbria, Cumbria and Lancashire, Norfolk and Suffolk, and Cambridgeshire and Northamptonshire. Civil service rules meant that McDowell could theoretically have exempted himself from inspecting services run in those areas by his wife’s company but it would still have left questions about his ability to act as a national regulator.