Yesterday, pageant winner Avianca Bohm (22) had her tiara taken from her because her South African citizenship meant she was ineligible to hold the title.
Her replacement is first runner-up Talia Bennett (23).
Miss Cooley (22), who was born in Australia and is yet to apply for New Zealand citizenship, was told over the phone by competition organiser Val Lott last night she would no longer be able to hold her third runner-up title.
Earlier in the day, after news of Ms Bohm's exit broke, Miss Cooley told the Otago Daily Times she was "hoping for the best", saying she did not think organisers were too worried about her because although she was Australian by birth, she had lived in New Zealand since she was 10.
However, after last night's phone call, she said she understood Ms Lott's reasoning.
"Rules are rules and there can't be two sets for two different people. It's only right that if she loses her title, I step down from mine, too."
Miss Cooley planned to apply for New Zealand citizenship and would probably try again for the title next year.
"You never know. Everything happens for a reason."
She retained the Miss Otago title, she said.
