News Corporation's controversial attempt to buy the remainder of shares in BSkyB will be referred to the Competition Commission, Culture Secretary Jeremy Hunt told MPs.
The u-turn followed News Corporation's decision to withdraw the offer to hive off Sky News as a separate company as part of its approach for BSkyB.
The takeover bid by the News of the World's parent company had led to intense political pressure on the Government following the wave of fresh allegations about phone hacking at the now-defunct newspaper.
In a hastily re-drafted statement to the Commons, Mr Hunt said: "I know that colleagues on all sides of the House and the public at home feel very concerned at the prospect of the organisation which allegedly allowed these terrible things to happen being allowed to take control of what would become Britain's biggest media company.
"I understand that in the last few minutes News Corporation have withdrawn their undertakings in lieu."
He added: "As a result of News Corporation's announcement this afternoon I am now going to refer this to the Competition Commission with immediate effect."
Mr Hunt told MPs that he hoped the law "shows no mercy" to those involved in phone hacking - including "any managers who condoned such appalling behaviour".
Labour leader Ed Miliband took the unusual step of responding to the statement personally and accused Prime Minister David Cameron of leaving Mr Hunt to "carry the can" in an "insult to the House and to the British public".
Mr Hunt, who was heckled throughout his statement by Labour MPs demanding to know why the Prime Minister was not present, explained that his statement's contents had been "dramatically changed" by News Corporation's announcement.
An earlier draft of his statement, seen by the Press Association, stressed that the undertakings in lieu offered by News Corporation in relation to Sky News addressed the concerns over media plurality and Mr Hunt had no legal power to pause consideration of the deal.