Murdoch is ordered to slash Sky's ITV stake

The order, which has to be ratified by Business Secretary John Hutton early in the New Year, comes as a major blow to the Murdoch empire and could cost it up to £400 million.

But it will be greeted as a victory for Sir Richard Branson and his Virgin Media group, which vehemently opposed the holding.

Murdoch, who was then chief executive of Sky, spent £940 million in November 2006 buying ITV shares at 135p each in order to block attempts by Virgin Media - then called NTL - to take over ITV in a deal that would have created a £5 billion rival to Sky.

Despite the arrival of Michael Grade as executive chairman at ITV, an improvement in programming and some recovery in the advertising market, the broadcaster's shares have since fallen by almost 40% to today's 84p.

The Competition Commission said Sky must reduce its stake to less than 7.5%. It also rejected two alternative proposals Sky put forward, either to put its entire stake into a blind voting trust or not to vote any of its shares.

Hutton has asked for final comments on the Commission's ruling in the next two weeks, and his decision is due by 29 January.

It is usual for the Secretary of State to back the Commission's findings in such media probes. Many analysts believe this will again be the case, particularly as the Brown Government is seen as less close to the Murdoch empire than the Blair one was.

The Commission said Sky must not be allowed to have a seat on the ITV board, and should be set a fairly tight deadline to sell down its share stake.

Sky's holding would reduce competition between the two broadcasters and could be used by it to block moves by ITV to raise cash, make acquisitions or invest in rival technology, it declared.

Analysts said there was no obvious reason for Sky to keep any stake in ITV once it had cut its holding below a level at which it could exercise influence or prevent a takeover.

If it sold the entire stake at today's price, Sky would make a loss of £355 million plus the effective interest lost on tying up almost £1 billion of cash for the past year - another £55 million.

However, there is a slight possibility it might sell the stake to an overseas broadcaster such as RTL to be used as a launchpad for a takeover bid for ITV.

ITV said it welcomed the Commission's findings and looked forward to the final decision from Hutton.

A Sky spokesman said: "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."

Sky is likely to push Hutton to re-examine its last-minute offer not to exercise any of its voting powers on its ITV shares.