It follows the emergence of an 2011 email alleging she was linked to attempts to undermine the then director of the Serious Fraud Office (SFO).
Collins was the minister responsible for the SFO at the time.
She has denied the allegations and any suggestion of inappropriate behaviour, but said she had no choice but to step down.
"I am restrained in clearing my name while I am still a minister inside cabinet and I believe the right thing to do is to resign as a minister so I am able to clear my name," she said.
The lead up to New Zealand's September 20 election has been engulfed in a furore over underhand tactics following the release of a book based on emails hacked from the computer of a right-wing blogger.
The book "Dirty Politics", and subsequent leaks of further emails by the hacker, allege the centre-right government of Prime Minister John Key and the blogger Cameron Slater co-operated in a sustained dirty tricks campaign.
Key has repeatedly had to defend Collins who was identified as a link to Slater in some of the emails.
However, he said the Slater email that led to her resignation was one sent anonymously to his office and contained information that raised allegations about Collins' conduct as a minister.
"The relationship between a minister and their chief executive is vital, and goes right to the heart of a trusted, effective government," he said.
"This new information suggests Ms Collins may have been engaged in discussions with a blogger in 2011 aimed at undermining the then director of the Serious Fraud Office. Ms Collins was the minister responsible for the SFO at the time."
Collins, popularly nicknamed "Crusher", was previously tipped as a likely successor to Key.
In announcing her resignation, she said she was not party to the latest email relating to her and the SFO and was only made aware of it on Saturday.
