City watchdog forces BSkyB to drop controversial stake in ITV

The Competition Commission also said it wanted BSkyB to promise that it would not seek representation on ITV's board.

The regulator said that BSkyB should either sell all of its shares or cut its stake to below 7.5 per cent.

The findings were published ahead of a final ruling from John Hutton, Business and Enterprise Secretary, in the new year.

Mr Hutton is required to accept the Commission's competition findings, but could still come to a different conclusion on the proposed remedies. He has until January 29 to announce his final decision.

Sky could make substantial losses if it is forced to reduce the stake, which it bought for £940 million last November and is now worth less than £600 million.

ITV shares have fallen by more than a third in value since BSkyB made the surprise move to snap up the stake. ITV said today it "welcomed" the publication of the Competition Commission's report and said it awaited a final decision from Mr Hutton.

The commercial broadcaster had urged the Commission to consider a complete sale of the stake, although in the same submission it said it would be prepared to accept a cut to 4.9 per cent if Sky was denied a seat on the board.

BSkyB said in a statement: "We note the publication of the report and we are considering its contents carefully. The next phase of this process lies with the Secretary of State. We will be making representations to him in due course."

BSkyB - until recently headed by chief executive James Murdoch, who took over from his father Rupert as non-executive chairman this month - has always maintained that it has not broken any merger rules and made the shares purchase as a long-term investment.

But BSkyB's acquisition of the holding last year shocked the industry, scuppering Virgin Media's plans to merge with ITV and angering major Virgin Media shareholder Sir Richard Branson.

Virgin Group and Virgin Media have both argued in submissions to the Competition Commission that Sky should be forced to sell its entire 17.9 per cent holding in ITV.

Analysts said today's findings could re-ignite takeover speculation surrounding ITV.

Martin Slaney, of GFT Global Markets, said: "The recommendation from the Commission re-opens the door for Virgin Media and other potential suitors to seek a possible merger with ITV.

"Whatever BSkyB claimed about its stake-building intentions in ITV prior to now, this recommendation to reduce the stake by more than 10 per cent will come as a strategic blow to BSkyB."

Investigations by watchdogs Ofcom and the Office of Fair Trading concluded that the stake raised "significant" competition and public interest concerns, leading to the Competition Commission inquiry, launched in May.