In his plea agreement, he admitted he rented two rooms in an Absecon motel where Councilman Eugene Robinson was secretly filmed receiving oral sex from a prostitute.
Callaway is to be sentenced Dec. 4 to three years on the conspiracy charge, but will be able to serve it at the same time as his federal term for bribery.
He will not have to testify against other defendants in the case, which include two of his brothers, and an incumbent City Councilman, John Schultz.
The surprise guilty plea came shortly after Robinson filed a lawsuit against Callaway and the other defendants, claiming he was humiliated and suffered extreme emotional anguish after the tape's existence was made public.
Robinson, a Baptist minister, has said that the sex was consensual and that money he gave the woman was to buy sodas.
Prosecutors said Callaway used the tape to try to force Robinson to resign, but Robinson contacted authorities instead.
According to testimony from an FBI agent earlier this year at preliminary hearings in the case, Callaway rented two rooms at the Bayview Motel and another defendant placed a camera hidden in a clock radio inside one of the rooms. The camera sent a video stream to a recorder in the adjacent room.
The agent said the Callaways paid a woman, whom he did not identify, between $150 and $200 to lure Robinson to the motel and perform a sex act on him.
Craig Callaway edited the video on his home computer, then yanked out the hard drive and threw it into the ocean, the agent said. Schultz arranged for a computer expert to help edit the video and blur the woman's face, according to the agent's testimony.
Schultz, Callaway's brothers Ronald and David, and a friend, Floyd Tally, have all pleaded not guilty and are scheduled for a Jan. 13 court hearing.