Last month a report found South Ribble Council had a lack of awareness about ensuring passenger safety issues surrounding taxi licence applications.
Tory councillor Margaret Smith had faced calls for her to quit from her own party over the handling of the taxi licensing row.
A full council meeting was informed she resigned due to "ill health".
Ms Smith, who has been leader of the authority for the past nine years, was not present at the meeting in Leyland.
Her resignation letter was read out by chief executive Mike Nuttall and was "with immediate effect".
An audit of taxi driver licence applications in December had found appropriate background checks had not been carried out in relation to 40 working taxi drivers in South Ribble.
An independent report, written by solicitors Wilkin Chapman LLP in June, concluded the issues surrounding taxi licence applications had been addressed so it was not necessary to make any further recommendations.
Earlier this week, four of Ms Smith's Conservative colleagues resigned from the group, saying they could not support the leadership due to "ongoing circumstances and failures".
The council is now under no overall control for the first time in almost a decade.
Councillor Colin Clark was unanimously voted in as the interim leader of the authority at the meeting on Wednesday.
Councillor Cliff Hughes, who has worked with Ms Smith for over 30 years, said she was "hard working and a "good colleague" who "gets on with the whole group".
He said one of the "great strengths" of the council was that "whilst the parties are diverse, we do actually get on together and make decisions together and I think that's because Margaret led us into that".
The leader of a council at the centre of claims children were sexually exploited by taxi drivers has resigned.