The senior Liberal and opposition leader in the state's upper house said on Friday the inquiry involved several people with whom he has had close political relationships.
The NSW Independent Commission Against Corruption will begin hearings from July 27 under Operation Rosny.
A focus of Operation Rosny is alleged links between controversial property developer Jean Nassif and Liberal Party members, including the brothers of former Liberal premier Dominic Perrottet.
The watchdog will assess whether political donations from Nassif and his development company Toplace were taken in return for favourable outcomes between 2020 and 2023.
While Mr Tudehope himself is not accused of any wrongdoing, he said in a statement he feared his involvement would constitute a distraction in the lead-up to the March state election.Â
"The recent announcement by the ICAC that Operation Rosny will soon begin a public inquiry into alleged political donations involves several people with whom I have had close relationships during my political career," Mr Tudehope said.
"There is no suggestion of any wrongdoing by myself, nor am I under investigation.
"However, as I have been called as a witness to the inquiry, something I am more than happy to comply with, I am concerned that, while the public hearings are under way, my position as shadow attorney-general and leader of the opposition in the Legislative Council could become an unnecessary distraction."
Opposition Leader Kellie Sloane earlier questioned the timing of the inquiry, describing it as a "massive distraction" that was damaging to her party.
Mr Tudehope said he had spoken to Ms Sloane and she had accepted his reasons and offer to step aside.
The inquiry will also scrutinise political donations by figures including former Catholic Schools NSW chief executive Dallas McInerney and hotelier Michael O'Hara between 2019 and 2023.
Mr McInerney, a factional ally of federal Liberal leader Angus Taylor, temporarily stepped aside on Thursday over his involvement with the inquiry.
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