Disgraced MP Tim Owen faces the threat of up to 10 years in jail for lying to the NSW corruption watchdog over his shady dealings with property developers.

The former Newcastle MP on Tuesday morning came clean about taking $10,000 of prohibited donations from property developer and now Newcastle Mayor Jeff McCloy in late 2010, just months out from the March 2011 election.

And within hours of his explosive evidence, the ex-military leader resigned from parliament.

"Everyone in NSW, everyone in the electorates has the right to feel appalled, angered and betrayed," NSW Premier Mike Baird told the house of the corrupt activities of Mr Owen and ex-Charlestown MP Andrew Cornwell.

Mr Owen told the Independent Commission Against Corruption (ICAC) on Monday he returned an envelope, one-centimetre thick with $100 notes, with a message saying "no thanks".

But he changed his tune on Tuesday.

When Mr McCloy's lawyer put it to Mr Owen that he had lied about returning the $10,000 in cash, the former deputy commander of the Australian forces in Afghanistan and Iraq conceded he had put the money into his campaign.

Following a distinguished 32-year career in the Royal Australian Air Force, Mr Owen in 2011 won the seat of Newcastle, traditionally a safe Labor electorate.

Newcastle had previously been held by the ALP for almost 85 years, except during 1988 and 1991 when independent George Keegan held sway.

Mr Owen said the $10,000 deal wasn't to buy influence and had been organised by either his campaign manager Hugh Thomson or former police minister and Central Coast MP Mike Gallacher.

Mr McCloy met with Mr Owen on Sunday, the day before he was due to give evidence, to fabricate the tale ICAC would be told.

The inquiry heard that Mr Owen wanted to mislead the ICAC by saying the amount was only $2000 and it had been returned.

"I'm not proud of it," he said.

Mr Owen's former campaign staffer Joshua Hodges earlier told the ICAC he knew his $10,000 wage was paid by property developer Nathan Tinkler's Buildev company and building suppliers and developers Saddingtons, to subvert electoral fundraising laws.

Developers have been banned from making political donations in NSW since 2009.

Mr Owen is the eighth NSW Liberal scalp claimed by the ICAC this year.

His seat of Newcastle and that of the neighbouring electorate of Charlestown will have by-elections after Dr Cornwell also resigned on Tuesday over damning evidence last week.

Dr Cornwell, the former government whip, admitted to taking a brown paper bag stuffed with $100 bills from Mr McCloy.

Cash was then run through a company called Harmony Hill and funnelled back to the NSW Liberal Party.

Dr Cornwell also raised $10,000 through the bogus sale of a painting to developer Hilton Grugeon despite the artist's work normally fetching about $300.

Mr McCloy is due to appear at ICAC on Thursday.

The NSW Central Coast region has become synonymous with political corruption.

Former Liberal resources minister Chris Hartcher, the MP for Terrigal, stood down in December and retreated to the cross benches amid accusations of corruption.

Upper house Central Coast MP Mr Gallacher is also fighting for his political life over his dealings with Mr Tinkler.

Notorious ALP figures Craig Thomson, Eddie Obeid and Ian MacDonald were all also heavily associated with the area.

The inquiry continues.