The British, who are much less shy about talking up sex scandals among the powerful than we are (we prefer our sex scandals to be beautiful, not interesting) have taken note of Paul Wolfowitz's not-as-private-as-he-thought relationship history. It seems that he's very close to a staffer with a history of ties to Middle East anti-authoritarian activism. This might or might not have affected his views on Iraq, etc., but he clearly had some of those ideas independently before he "took up" with her. She's divorced; he's separated (over an apparently different affair).
I'm not entirely sure that I see the problem. Aside, of course, from the institutional one -- his habit of relationships with women in his own organizations is decidedly against the rules -- it's absurd to suggest that one person's influence could have pushed our government entirely in the direction of invading Iraq if there wasn't already a strong prediliction in that direction. It's not at all surprising that he's involved with a woman of strong and compatible opinions.
Sure, there's the "vengeance for Clinton" factor and the "hoist on their own petard" factor (though Wolfowitz himself has no truck with the social conservative wing, as near as I can tell), and the guy clearly should be kept on a pretty short leash. If he violates institutional policy about relationships, he should be disciplined. But I'm not sure that disqualifies him from a new position.
The fact that he's got no economic training, a deeply biased perspective, a toady attitude and no international support (unless you count the female Middle Eastern expatriate communities)... that should disqualify him.