Estonia’s prime minister has resigned amid a sprawling corruption scandal that ensnared his party and a populist ally, bringing to an end a controversial coalition in the Baltic state on Nato’s frontline with Russia.

Juri Ratas stepped down early on Wednesday after his Centre party and its secretary-general were named as suspects in a criminal investigation over a property development in Tallinn which received a state loan meant for companies hit by the pandemic. Another suspect is an adviser to the minister of finance Martin Helme, who is also head of the far-right Ekre party.

The resignation brings to an end perhaps the most controversial coalition since Estonia regained independence from the Soviet Union in 1991.

The inclusion of the populist Ekre in government threatened the Baltic country’s liberal image after its leaders insulted everybody from gays and immigrants to Finland’s prime minister, US president-elect Joe Biden and Lithuania’s new government.

The three-party coalition has been embroiled in a constitutional stand-off with Estonia’s president Kersti Kaljulaid ever since it took power in April 2019. Ms Kaljulaid, who told the Financial Times last month that Estonia was undergoing “a conflict of values”, wore a sweatshirt in 2019 saying “speech is free” as ministers were sworn in, with Mr Helme causing controversy by appearing to use a white supremacist symbol as he took his oath.

Mr Ratas said both the state prosecutor and Estonia’s internal security service had assured him there was nothing linking him to the corruption scandal. But he said the allegations “cast a serious shadow on all the parties involved” and that his resignation would help “achieve clarity”.

Ms Kaljulaid on Wednesday invited Kaja Kallas, head of the centre-right Reform party, which has the most seats in Estonia’s parliament, to try to form a new coalition. Reform had been expected to head a government in 2019 before Mr Ratas surprisingly formed a deal with Ekre and the conservative party Isamaa. Politicians from the three parties currently in power all said it was a possibility that their coalition could continue but with another prime minister.

The scandal involves the Porto Franco real estate development in the capital’s harbour area, which includes offices, shops and a hotel, and also signed a loan agreement with the European Bank for Reconstruction and Development. The EBRD said the loan was never disbursed and expired last year.

Prosecutors are looking into a €39m loan given by Estonia’s state credit agency last year under a scheme designed to help businesses hit by Covid-19. Prosecutors suspect the Centre party of influence peddling as well as its secretary-general Mihhail Korb, who has also resigned.

Prosecutors alleged late on Tuesday that the party agreed with the businessman behind Porto Franco that it would back the loan for the development in return for a donation of up to €1m.

Ms Kaljulaid said on Wednesday that the rules around party financing needed to be urgently reviewed.

Mr Helme, the finance minister, suspended his adviser Kersti Kracht, who is also a suspect in the investigation, and said he had “zero tolerance for corruption” while the party had received no money.

None of the suspects has commented yet on the allegations.