Lib Dem peer says his efforts to "expose and end cash-for-peerages in all parties, including our own" have failed.
Peer leaves the party and warns it is "heading for disaster" under Clegg.
"Appropriate steps" will be taken against the rebellious peer.
The party would perform no better under Cable, and Lib Dem voters and the party's 2010 supporters want him to stay.
The Lib Dem leader should seek a renewed mandate from his party.
Clegg is unwilling to fall on his sword and the party isn't prepared to force him out.
Vince Cable says the Lib Dem leader took a "gamble" by campaigning on Europe, while Lynne Featherstone says her party has lost its "humanity".
Cameron fears the collapse of the coalition. Labour fears a more popular centre-left leader.
The more parties, broadcasters and papers pile in, the greater the danger of a non-agreement.
It would enhance his bargaining power, while the Tories can remind him that they allowed a vote on AV.