BSkyB, the satellite broadcaster, should cut its stake in ITV to less than 7.5 per cent because the shareholding reduces competition in the all-TV market and works against the public interest, the Competition Commission said today.

The watchdog also recommended that the Secretary of State should seek undertakings from BSkyB that it would not seek representation on the board of ITV.

If BSkyB sold 10.4 per cent of its 17.9 per cent ITV holding at today's price of 84.2p, it would crystallise a loss of £205 million.

John Hutton, the Secretary of State for Business, has until January 29 to consider the Competition Commission's report and announce final decisions, but in publishing the findings early he has indicated that he is minded to accept its possible remedies.

The move reopens the door for Virgin Media and other potential suitors to attempt a merger with ITV.

As the market opened, shares in ITV rose by 1.2p to 84.2p on possible takeover speculation, while BSkyB shares were virtually unchanged.

The watchdog decided against forcing BSkyB to sell the whole of its 17.9 per cent stake, as demanded by Virgin Group, saying that a partial sale was less intrusive and that with a holding of less than 7.5 per cent Sky would be unable to influence materially the stragegy of ITV.

BSkyB, which is 39.1 per cent owned by News Corporation, parent company of The Times and Times Online, had proposed that it should place all its voting rights in ITV in a voting trust or that it undertake not to exercise the entirety of its voting rights.

The Competition Commission said that it had concerns about enforcing these remedies and concluded that they would not effectively address the competition problems.

In a statement, ITV said that it welcomed the Competition Commission's report and awaited a final decision by the Secretary of State.

A statment from BSkyB said that the broadcaster was considering the contents of the watchdog's report carefully.

It said: "The next phase of this process lies with the Secretary of State. We will be making representations to him in due course."

BSkyB snapped up the stake in ITV for £940 million, or 135p a share, in November 2006, when NTL, its pay-TV rival, was trying to mount a takeover.

BSkyB, where James Murdoch, the former chief executive, replaced his father, Rupert Murdoch, as non-executive chairman this month, has always insisted that it had not broken any merger rules when it acquired its ITV stake, which it called a long-term investment.

Analysts said that today's Competition Commission recommendations were a blow to BSkyB's strategy.

Martin Slaney, of GFT Global Markets, said: “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.”

The Competition Commission launched its inquiry into Sky's shareholding in May, after the communications regulator Ofcom and the Office of Fair Trading concluded that the stake raised “significant” competition and public interest concerns.

The Competition Commission said that there was likely to be a substantial lessening of competition arising from the loss of rivalry between ITV and BSkyB in the all-TV market.

"This may be expected to result in a reduction in the quality of the offer, a reduction in innovation, or an increase in the price of audiovisual services," the Competition Commission found.

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