The personal details of virtually every child in the UK has been lost by HM Revenue and Customs, the chancellor, Alistair Darling, admitted today.

The missing information includes the names, addresses and dates-of-birth of the children and the national insurance numbers, and in some cases the bank details, of parents claiming child benefits.

More than 25 million individuals are affected.

Paul Gray, the chairman of HM Revenue and Customs, today resigned over the "extremely serious failure" of security.

In a Commons statement greeted by gasps of astonishment from MPs, Darling said that two discs containing details of the 7.25 million families claiming child benefit, sent to the National Audit Office, failed to reach the addressee.

The chancellor told MPs the information went missing after a junior official in the department failed to follow standard procedures and sent a "full copy of the data" to the NAO by courier - not by recorded or registered mail.

When it became clear the discs had not arrived, the same official sent the information again - this time by registered post.

The first set of data was sent on October 18, and senior management at HMRC was told it was missing on November 8. The chancellor said he found out 10 days ago.

"I deeply regret this and apologise for the anxiety caused," Darling said. But he insisted there was no suggestion the information had "reached the wrong hands".

The Metropolitan police has confirmed it is investigating the loss of the discs.

Officers have searched a child benefit office in Washington, Tyne and Wear, sources said.

A spokesman for the force said: "We have got officers in the area assisting with inquiries in connection with the missing child benefit data."

Earlier this month, BBC Radio 4's Money Box programme reported that a CD containing the personal details of thousands of Standard Life pension holders had gone missing.

Nearly 15,000 customers were warned to be on high alert for potential scams after their data was lost in transit by an external courier.

It is understood Gray's resignation was accepted because the discs had been transported in breach of rules governing data protection.

It is not yet clear how damaging the revelation will be for the chancellor but the move comes less than 24 hours after he had to face MPs over the Northern Rock crisis.

Downing Street said the prime minister had "full confidence" in Darling despite the benefits records blunder. Gordon Brown's spokeswoman added that Darling has not offered to resign.

Vincent Cable, the Liberal Democrats' Treasury spokesman and acting leader, said earlier today: "Cumulatively, it is very damaging, taken together with other Treasury disasters such as the penalty system introduced for benefit overpayments.

"Obviously this predates Alistair Darling's time in office, but if there is a wider political point it is that it shows Gordon Brown paid little interest to the complex tax systems he introduced."

Chris Huhne, one of the two candidates for the Lib Dem leadership, said: "We will have to see exactly how much Alistair Darling knew and exactly how much has been covered up over what period of time.

"But frankly it is a very major problem of delivery of this kind in an absolutely key department and I think it's going to be very hard for ministerial heads not to roll."

Michael Fallon, a Conservative member of the House of Commons Treasury committee, said that he was "stunned" by Gray's departure.

"Paul Gray is a very distinguished public servant who had served successive governments and we thought had a very good grip on the problems at Revenue & Customs," he told BBC News 24.

"HMRC was created by the merger of the Inland Revenue and HM Customs and Excise at a time when the Treasury was demanding thousands of staff cuts, and has been under "immense pressure", said Fallon.

He said that the affair raised new questions about Darling's performance as chancellor.

"We were already beginning to wonder whether the chancellor was up to this. Being chancellor of the exchequer is an enormous job and so far Mr Darling has not looked very sure-footed," he said.

"He was slow to respond to the Northern Rock crisis and there have been persistent rumours that all was not well at Revenue & Customs.

"It may be that he has taken his eye off the ball with the organisation."

MPs would want reassurance that Revenue & Customs - which is responsible for gathering in taxes, as well as ensuring people get the tax credits to which they are entitled - is "fit for purpose", said Fallon.

"This is a major department of government and we need to be reassured pretty urgently that this department is fit for purpose," he said.

Security experts said ministers should have taken immediate action to prevent ID theft and fraud.

Mike Greene of software security company PC Tools said: "If they knew that the disc had gone missing they should have told people immediately so that they could more closely monitor their bank accounts for signs of fraudulent activity.

"Once the information is out there, there is absolutely nothing that you can do to get it back.

"Heads need to roll if it turns out that the vital bank and personal details on the CD were not properly encrypted.

"There's no excuse to be carrying around physical copies of this data in this day and age without encryption."

Campaign group Action on Rights for Children (Arch) warned that children could have been put in danger. "It's a simple and vital precaution which any self-respecting government agency should be practicing," its director, Terri Dowty, said.

"This appalling security lapse has placed children in the UK in immediate danger especially those who are already vulnerable.

"Child benefit records contain every child's address and date of birth. We are not surprised that the chair of HMRC's board has resigned immediately."

Arch accused the government of ignoring warnings over the dangers of creating "large centralised databases" of sensitive information about children.