Former culture secretary Jeremy Hunt failed to supervise his special adviser properly during the BSkyB bid, creating a "serious hidden problem" in the Government's handling of the affair.
Lord Justice Leveson said that although there was no evidence to suggest Mr Hunt was biased, the risks of allowing Adam Smith to be the point of contact between the Department for Culture, Media and Sport (DCMS) and News Corp lobbyist Fred Michel should have been "obvious from the outset".
Revelations over the close relationship between Mr Smith and Mr Michel prompted the former to resign as Mr Hunt's special adviser in April, admitting his activities "at times went too far". Mr Hunt, now Health Secretary, resisted repeated calls for his own resignation, despite the controversy over his role in the bid.
The Leveson report found there was no "credible evidence" that Mr Hunt was biased, but said there was a lack of supervision of Mr Smith by the then culture secretary. During the inquiry, the close relationship between Mr Smith and Mr Michel was laid bare, with slews of emails and text messages between the men revealed.
The inquiry heard that Vince Cable, in his role as Business Secretary, originally took responsibility for News Corp's bid to increase its holding in BSkyB in 2010. But after he was recorded saying he would "declare war" on media tycoon Rupert Murdoch, responsibility for the bid was transferred to Mr Hunt.
The Leveson report said Mr Hunt had put "robust systems" in place to make sure the bid would be handled properly. But it revealed Mr Smith - who the inquiry heard already knew Mr Michel - as a "serious hidden problem".
"In every respect bar one, the bid was commendably handled," the report said. "Unfortunately, there was a serious hidden problem which, had the bid ultimately gone through and that problem come out, would have had the potential to jeopardise it altogether.
"Mr Hunt's special adviser, Adam Smith, was the known point of contact between DCMS and News Corp's professional lobbyist, Frederic Michel. Mr Smith already knew Mr Michel, and, when faced with the intimacy, charm, volume and persistence of Mr Michel's approaches, he was put in an extremely difficult position. The processes that were put in place to manage the bid did not prove to be robust enough in this particular respect. Best practice of the kind subsequently encapsulated on the Cabinet Office guidance on quasi-judicial decision-making was not followed."
Lord Justice Leveson went on: "I have concluded that the seeds of this problem were sown at an early stage, and that the risks were, or should have been, obvious from the outset. I doubt the wisdom of appointing Mr Smith to this role."
Reacting to Lord Justice Leveson's findings, Mr Hunt said: "I welcome the fact the report states that not only was there no evidence of actual bias on my part in the handling of the BSkyB bid but that I put in place robust systems to ensure it would be handled with impartiality. However, I have always accepted lessons needed to be learned, in particular with respect to the role of special advisers, which is why guidance has since been issued."