ANNAPOLIS, FEB. 4 -- Adele Wilzack, Maryland's secretary of health and mental hygiene, resigned today as allegations of mismanagement continued to swirl around the department.

Wilzack, who for eight years headed the state agency with the largest budget, said her presence was diminishing Gov. William Donald Schaefer's ability to lead the state "in a time of crisis" and distracting the General Assembly from important health issues.

Her announcement came as the Attorney General's Office and a grand jury are investigating allegations of wrongdoing in the Maryland State Games, a now-defunct sports program that was run by Wilzack's department.

Health department officials financed most State Games activities through a nonprofit foundation. State auditors later questioned more than $460,000 in foundation expenditures.

Wilzack's resignation, which Schaefer said caught him by surprise, comes after Maryland failed in its bid to host a U.S. Olympic festival, a national amateur competition held in non-Olympic years. The controversy was a factor in Maryland's losing out, a festival official said.

Also last week, leading legislators threatened to trim $1 million from the department's budget unless Wilzack stepped down.

The controversy began with reports that State Games money was used to rent Ocean City condominium apartments, to pay one employee who was in jail and to hire relatives of state employees.

In her defense, Wilzack said she disbanded the program and dismissed State Games Director James E. Narron and Deputy Secretary John M. Staubitz Jr. after she learned of the problems. She said she did not personally oversee the State Games, an Olympic-style event that drew about 3,000 participants last year.

Schaefer, attending the National Governors' Association midwinter meeting in Washington, said he was saddened by Wilzack's departure, calling her a "very decent, caring person."

"She trusted people that she has worked with, and they let her down in the worst possible way," Schaefer said.

But some of Wilzack's most vocal critics said that her decision to step down was appropriate.

"She is ultimately responsible for the behavior of employees, and one of them seriously betrayed her," said Del. Howard P. Rawlings (D-Baltimore), referring to Staubitz. Rawlings's Appropriations subcommittee oversees the health department budget.

The employee's "behavior helped to undermine the public's trust in government, and the scandal was a textbook example of mismanagement, misappropriation, nepotism and possible criminal activity," Rawlings said.

Wilzack, whose annual salary was $102,000 and whose department has a $2.4 billion annual budget, blamed subordinates for what she called "clearly mismanagement and abuse" of the State Games.

"The people require a strong secretary who can speak on health issues in these difficult days," Wilzack said in a prepared statement. "At this point, I have concluded that I will serve the state best by stepping aside and resigning my office."

Senate President Thomas V. Mike Miller Jr. (D-Prince George's) had suggested earlier that the department budget be trimmed if Wilzack did not resign. Miller said today that the resignation was "unfortunate," but that the investigation should continue.

"The secretary, either by misfeasance, malfeasance or simple omission, was the cause of anywhere between $500,000 and $1 million being misspent on programs other than those for which the funds were designated, which was alcohol and drug abuse prevention," Miller said.

Sen. Julian L. Lapides (D-Baltimore), who lashed out at Wilzack during a hearing last week, said many questions remain. "We can't wipe everything under the rug," he said.

Wilzack's departure leaves open the question of what will happen to the State Games. Wilzack disbanded the program this year, but it could be revived and operated by the Department of Economic and Employment Development.

Staff writer Howard Schneider contributed to this report.