Matt Hancock, UK culture secretary, said he agreed with the markets authority that divesting Sky News to Disney or another suitable buyer - with a deal that would see the operations funded for at least 10 years - "is likely to be the most proportionate and effective remedy for the public interest concerns that have been identified".
The decision clears the way for a bidding war between Fox, which already owns 39pc of Sky, and U.S. media giant Comcast, which swooped in with a £22bn (€25bn) bid after Fox's takeover attempt was held up by regulators.
If the government gives Fox the go-ahead to buy Sky, Rupert Murdoch faces another fight before he wins the prize.
Fox welcomed Hancock's announcement, and noted that it had already proposed divesting the platform's 24-hour news channel to Disney regardless of the fate of its bid for the wider Fox assets.
Sky stock rose 0.3pc to £13.54 (€15.64) in London yesterday. Since then, Comcast made a bid for Sky, outbidding Fox's, and Disney made a bid for certain Fox assets. Murdoch's Fox group said in a statement "that it has reached agreement with Sky plc on the terms of a recommended pre-conditional cash offer" to buy the rest of the European pay broadcaster, beyond the 39 percent it already owns. Mr Watson also highlighted a string of lawsuits for sexual harassment and discrimination against the USA cable channel Fox News, also owned by 21st Century Fox.
He said that any such deal could proceed but only if he could be confident that the final undertakings ensure that Sky News remained financially viable over the long-term; was able to operate as a major UK-based news provider; and was able to take its editorial decisions independently, free from any potential outside influence.
Sky's independent directors withdrew their recommendation for the Fox offer to shareholders after Comcast (Swiss: CMCSA.SW - news), the owner of Universal Pictures, confirmed a bid for Sky of £22.5bn.
"Sky is a gem of British broadcasting, respected worldwide".
The takeover was held up by politicians and regulators who feared it could give Rupert Murdoch too much influence over the media in the UK.