The White House — where some aides were caught off guard by the withdrawal — initially responded harshly to Gregg’s announcement, portraying the New Hampshire Republican as someone who sought the job and then had a “change of heart.”

In a statement, White House press secretary Robert Gibbs said Gregg had “reached out to the president and offered his name for secretary of commerce” — and that he’d promised that, “despite past disagreements about policies, he would support, embrace and move forward with the president’s agenda.”

Obama himself told an Illinois newspaper that Gregg’s withdrawal was “something of a surprise” because the senator had “approached us with interest and seemed enthusiastic.”

Although one White House aide said he was “blindsided” by the news, chief of staff Rahm Emanuel said Gregg signaled to the administration earlier in week that he was having second thoughts and Obama met with him Wednesday at the White House to urge him to stay.

In an on-plane briefing as the president flew on Air Force One to Springfield on Thursday evening, Gibbs said that Gregg told the president of his decision to withdraw in a telephone call on Wednesday.

But Obama later told the pool reporter on the flight that he hadn’t known until today, and called Gregg “a good man” who had a “change of heart.”

Still, there was no joint statement — as there was when former Sen. Tom Daschle withdrew as Obama’s Health and Human Services nominee — and the tension between the White House and Gregg was clear.

“Once it became clear after his nomination that Sen. Gregg was not going to be supporting some of President Obama’s key economic priorities, it became necessary for Sen. Gregg and the Obama administration to part ways,” Gibbs said.

“There is not hard feelings. It is better that it happened now than after the fact,” said Emanuel. But he added that, “if I said it wasn’t a disappointment, that would lack any credibility.”

In an interview with Politico Thursday afternoon, Gregg said he “should have faced up” to the conflicts he felt earlier.

“I’ve been my own person, and I began to wonder if I could be an effective team player,” the New Hampshire Republican said. “The president deserves someone who can block for his policies. As a practical matter, I can contribute to his agenda better — where we agree — as a senator, and I hope to do that.”

“The fault lies with me,” Gregg told Politico. He refused to discuss any conversations he had with Obama, saying, “I may have embarrassed myself, but hopefully not him.”

At a Capitol Hill press conference, Gregg also said he will “probably not” run for reelection to the Senate in 2010. If he retires from the Senate, Democrats may get a consolation prize for this embarrassing turn of events — one of their own in Gregg’s Senate seat.

In his statement announcing his withdrawal, Gregg cited his problems with the economic stimulus bill, as well as partisan disagreements over how to run the census, as reasons for pulling his nomination. He was quick to point out that there was nothing in the vetting process that made him yank his own nomination.

Ultimately, Gregg said, he and Obama “are functioning from a different set of views on many critical items of policy.”

Gregg was Obama’s second choice as commerce secretary. His first, New Mexico Gov. Bill Richardson, withdrew because of an ongoing investigation in his home state. Daschle withdrew amid questions about his past taxes, as did Obama’s pick to be the government’s chief performance officer.

In his statement, Gregg said he admires Obama’s “willingness to reach across the aisle.”

“However, it has become apparent during this process that this will not work for me, as I have found that on issues such as the stimulus package and the census, there are irresolvable conflicts for me,” Gregg said. “Prior to accepting this post, we had discussed these and other potential differences, but unfortunately we did not adequately focus on these concerns. We are functioning from a different set of views on many critical items of policy.”

Sen. Patty Murray (D-Wash.), a member of the Democratic leadership, said she expected Gregg to have a smooth confirmation. She said she learned about the decision when the news broke Thursday afternoon.

“I had heard no objections whatsoever,” Murray said. “I’m as surprised as anybody.”

Republicans celebrated Gregg’s decision to stay in the Senate — and gloated over the embarrassment the Obama team was facing.

“Sen. Gregg made a principled decision to return, and we’re glad to have him,” said Senate Minority Leader Mitch McConnell (R-Ky.). “He is among the smartest, most effective legislators to serve in the Senate — Democrat or Republican — and a key adviser to me and to the Republican Conference. It’s great to have him back.”

McConnell discouraged Gregg from accepting the commerce nomination before he took it, and he talked with him about withdrawing before he made his announcement.

While McConnell wouldn’t discuss the specifics of his conversations with Gregg, he said: “It’s totally safe to say I was not happy to have a member of my team leave the Senate and go to the administration.”

Sen. Lamar Alexander (R-Tenn.) was equally happy to have one of the top financial minds in the GOP back on the Republican side of the Senate aisle. “Judd Gregg would have been a strong Cabinet member, but it is good for the country and the Senate that he will continue to be a Republican senator.”

At least one group of Democrats was happy with the development — the Congressional Black Caucus. The caucus was worried about how Gregg would handle the counting of minorities in the 2010 census, which will be one of the major tasks of whoever ends up becoming commerce secretary.

“When Sen. Gregg was first nominated, members of the CBC expressed concerns about his commitment to core functions of the Commerce Department, like the census and minority- and women-owned businesses,” said Rep. Barbara Lee, chairwoman of the Congressional Black Caucus. “In his statement today, Gregg expressed ‘irresolvable conflicts’ on these very same issues. In light of this, we feel that his decision to withdraw is in the best interest of all parties.”

The Gregg news comes as a caretaker Republican, Bonnie Newman, prepared to serve out the remainder of Gregg’s term and prominent members of both parties in the Granite State begin to line up for the 2010 race.

Jonathan Martin, Ben Smith, Amie Parnes, Manu Raju and John Bresnahan contributed to this story.