Business Secretary Vince Cable will stay in cabinet despite "declaring war" on Rupert Murdoch, says Downing Street.
But he will be stripped of his powers to rule on Mr Murdoch's bid to take control of BSkyB, which will be handed to Culture Secretary Jeremy Hunt.
Downing Street said David Cameron believed Mr Cable's comments about Mr Murdoch were "totally unacceptable and inappropriate".
Labour said Mr Cable was a "lame duck" with "no credibilty".
BBC Political Editor Nick Robinson said Downing Street's statement was a "humiliating slap in the face" for Mr Cable and although he had kept his job he was still in a "very awkward" position, with questions over his judgement after telling "complete strangers" highly sensitive political information.
Nick Robinson said some Tory MPs would be questioning whether Mr Cable - who is seen as a key figure in holding the coalition together - would have been "out on his ear" if he had been a member of their party.
In a statement, a Downing Street spokesman said: "Following comments made by Vince Cable to the Daily Telegraph, the prime minister has decided that he will play no further part in the decision over News Corporation's proposed takeover of BSkyB.
http://www.bbc.co.uk/news/uk-politics-12053656