The Competition Commission has recommended that broadcaster BSkyB reduces its controversial 17.9 per cent holding in ITV to below 7.5 per cent.

The City watchdog also said it wanted to see undertakings from BSkyB that it would not seek representation on ITV's board. 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.

The Government is required to accept the Commission's findings on the competition issues but has discretion on remedial measures.

Although the ruling could cost BSkyB around £300 million at yesterday's share prices, analysts say the News Corp controlled broadcaster is likely to have succeeded in its long-term plan of preventing any rivals from buying the free-to-air broadcaster.

Sky bought its stake for £940 million last November and it is now worth less than £600 million. ITV shares have fallen by more than a third in value since BSkyB made the surprise move.

ITV said yesterday 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.

It said it believed BSkyB would be able to influence key strategic decisions, particularly with a number of "genuine and realistic prospective investments" under consideration.

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.

Since purchasing the stake, Mr Murdoch, aged 35, has stepped down to become head of the Asian and European operations at News Corporation.

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 the findings could re-ignite takeover speculation surrounding ITV.

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."

 Forced sale could see broadcaster lose £370m

The inquiry into BSkyB's 17.9 per cent stake in ITV was launched because of concerns over a lack of healthy competition.

The Competition Commission - an independent public body formerly known as the Monopolies and Mergers Commission - began its investigation in May after BSkyB spent £940 million buying into its competitor in November last year.

ITV bosses were worried that Sky's share could result in power being lost and key strategic decisions influenced.

BSkyB bought the shares for £1.35, but they are now valued at just 84 pence. Being forced to sell the entire stake would represent a loss of £370 million at today's prices.

Amanda Purton, head of equity research at Barclays Wealth, said the situation should be clearer next month when John Hutton, Business and Enterprise Secretary, announces his decision.

"Sky could try to find a strategic buyer to sell the whole lot or to asset swap with another company because there are funding issues at the moment with the credit crisis and liquidity squeeze."

She added that the expectation is that Mr Hutton will specify the timeframe in which the next move must be completed.

Asked about the possibility of Virgin Media buying part of BSkyB's stake, she said: "Virgin has a lot on its plate and funding is difficult at the moment.

"The economic slowdown impacts advertising quite directly so there are concerns for any broadcaster about the levels they will get over the next year.

"And that is not the best state when putting proposals to banks for funding. The media sector is seen as more risky because there is not such a solid asset base."