Rodney Hide says the Prime Minister was aware in June of his intention to quit as Local Government Minister if Maori seats are included on Auckland's super-council.
The Royal Commission on Auckland Governance spent over a year considering how the region's 1.4 million residents could be better served by their councils.
Auckland is to be governed by a super-council with one mayor elected by voters and a number of community boards.
The commission had recommended that three seats on the super-council be reserved for Maori, but the Government opposed the idea, saying it was unlikely to change its view.
Mr Hide, leader of the ACT Party, said that in June, Mr Key approached him to discuss allowing for mana whenua seats on the new council.
The Prime Minister has remained open to the idea of dedicated Maori seats, but has said the Government would take some convincing.
Mr Hide says they talked about the prospect of providing for Maori seats in the Auckland Governance legislation, currently before a parliamentary select committee, some months back.
Mr Hide says he told Mr Key at the time that he would quit if the seats were included - a stance he has reiterated on Thursday.
He said ACT would continue to support the Government because it has signed a confidence and supply agreement with National.
However, he would step aside as Local Government Minister as a matter of principle - a step for which he had the full support of his party.
Mr Hide says ACT has maintained its position of opposing separate Maori seats throughout discussions on the super-city and Maori representation, but this had not included making threats about its coalition deal with National.
Mr Hide's office says he would retain his other two portfolios - minister of regulatory reform and associate minister of commerce. He is a minister outside Cabinet.
Maori Party encouraged
The Maori Party says it will continue to campaign for guaranteed representation.
Party co-leader Pita Sharples says he has always found Mr Key open to discussing the inclusion of Maori seats on the super-council.
Dr Sharples says he has seen a shift in attitude towards them and believes they are now a possibility.
Idle threat, mayor believes
North Shore Mayor Andrew Williams says he is disappointed Mr Hide is trying to influence the select committee, and describes the announcement as an idle threat.
Mr Williams says it is just another sign that Mr Hide is out of touch with Aucklanders.
Manukau Mayor Len Brown says Mr Hide should try working within the select committee process.
Maori Party co-leader Tariana Turia says Mr Hide is just politicking with his promise to stand down.
She says a final decision should be based on what is right for Auckland and 45% of Aucklanders support the inclusion of Maori seats on the council.