Government regulators have demanded that Sky offload most of its stake in ITV because it threatens competition in the TV market, and could harm consumers.

The Murdoch-owned broadcaster bought 17.9 per cent of ITV earlier this year, in what was widely interpreted as a spoiler to a mooted takeover by Virgin Media. The Competition Commission today said it should reduce its investment to less than 7.5 per cent.

The watchdogs reckon Sky's ownership of a substantial portion of ITV would inevitably make the two compete less fiercely. That in turn "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," they wrote.

John Hutton, the secretary of state for business, has until 29 January to decide whether to follow the Competition Commission's advice and order a sale.

It would be bad news for Sky's balance sheet. ITV has continued to struggle since Sky paid £940m for the stake, and its southbound share price would mean a £200m loss on the deal.

The Competition Commission inquiry was launched in May, after Ofcom and and the Office of Fair Trading both flagged the deal as potentially anti-competitive.

Fans of tedious regulatory documents can read the Competition Commission's verdict here (pdf). ®

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• Competition Commission to probe Sky's ITV buy (24 May 2007)
• Ofcom and DTI slam Murdoch TV strategy (30 April 2007)
• Virgin lays down case against Sky (27 April 2007)
• Ofcom to pick over Murdoch's ITV stake (27 February 2007)
• Murdoch in ITV takeover spoiler (20 November 2006)
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