SAN FRANCISCO (Reuters) - Hewlett-Packard Co CEO Mark Hurd unexpectedly resigned on Friday after a sexual harassment probe found he had a “close personal relationship” with an HP contractor who received improper payments.

Mark Hurd, President, CEO and chairman of Hewlett Packard, testifies during a hearing held by the U.S. House Energy and Commerce Committee investigating Hewlett-Packard on Capitol Hill in Washington September 28, 2006. REUTERS/Kevin Lamarque

The shocking announcement from the world’s top personal computer maker sent its shares plunging 10 percent as Hurd is one of the most admired chief executives in Silicon Valley and credited with reviving the company after the tumultuous reign of Carly Fiorina.

HP said one of its former contractors, involved in marketing activities from late 2007 to the fall of 2009, had levied sexual harassment allegations at Hurd.

HP said Hurd, who is 53 and married, had a “close personal relationship” with the contractor. An investigation found no violation of HP’s sexual harassment policy, but did find that Hurd violated standards of business conduct, HP said.

There were instances where the female contractor received compensation or reimbursement without a legitimate business purpose, HP said.

A source familiar with the situation told Reuters that Hurd never had sex with the woman and that the expense account issues stretched over two years and amounted to no more than $20,000.

“The board investigation found that Mark demonstrated a profound lack of judgment that seriously undermined his credibility and damaged his effectiveness in leading HP and Mark agreed,” HP General Counsel Mike Holston said.

Hurd will be replaced by Chief Financial Officer Cathie Lesjak on an interim basis. Lesjak has taken herself out of consideration as the permanent CEO, HP said.

Hurd said the decision to step aside was a “painful” one.

“I realized there were instances in which I did not live up to the standards and principles of trust, respect and integrity that I have espoused at HP,” Hurd said in a statement.

News of the shake-up stunned the technology world. HP is the largest technology company in the world on a revenue basis, and is a major player in personal computers, servers, services and printers.

“Shock and puzzlement, that’s how it’s going to go down,” said Russell Hancock, president and chief executive of Joint Venture Silicon Valley, an area business group. “There wasn’t anybody who criticized his handling of the company.”

The buttoned-down Hurd brought stability to HP after Fiorina resigned in February 2005 in the wake of a controversial deal to acquire PC maker Compaq.

“Mark Hurd was extremely instrumental in turning this company around,” said Susquehanna Financial Group analyst Jeffrey Fidacaro. “There’s going to be a serious gap in leadership at the top of this company.”

HP, a Silicon Valley icon that was founded in a Palo Alto garage in 1939, has experienced a fair amount of turmoil in recent years. In 2006, former HP Chair Patricia Dunn resigned after reports surfaced that the company had hired private investigators to spy on board members and journalists to plug media leaks.

A SUCCESSFUL TENURE

Hurd will be well compensated as he departs HP. According to a regulatory filing, he will receive a severance payment of $12.2 million.

Shares of HP have more than doubled since Hurd, the former CEO of NCR Corp, took the helm five years ago, cutting costs and expanding HP’s footprint in the services market with acquisitions like the 2008 purchase of EDS Corp for $13.9 billion.

In a bid to reassure investors that its financials are healthy despite the departure of Hurd, HP raised its outlook for the full year, saying it now expects profit, excluding items, of $4.49 to $4.51 per share, compared with a previous outlook of $4.45 to $4.50.

HP said its board of directors has formed a search committee to find a new chief executive and board chair.

“It’s a negative because the positive leadership that HP has had under Hurd is identified with his name,” said Nehal Chokshi, an analyst with Technology Insights Research-Southridge Research Group.

HP, which was scheduled to report quarterly earnings later this month, also pre-reported its results.

Shares of Palo Alto, California-based HP closed at $46.30 on the New York Stock Exchange and fell to $41.50 in extended trading.