The bill, announced to Parliament last night, removes barriers preventing newspaper owners such as Murdoch -- whose News International owns The Sun and The Times -- with more than 20% of the national market, from owning the smaller terrestrial channel.
The government also plans to allow non-EU companies to own TV and radio licences for the first time. Culture secretary Tessa Jowell said the move would boost inward investment in the UK. The plan opens the way for companies like Viacom and AOL Time Warner to make moves on Carlton or Granada.
Jowell described the government's approach as one which was simple and "proprietor-neutral" and one which she hoped would "remove barriers to investment".
However, the ban stopping newspaper owners acquiring ITV, the main commercial network, remains in place.
The move to allow Murdoch to realise his dream to become owner of a UK terrestrial broadcaster will be viewed by some as a way of buttering up Murdoch to get him to help sort out the goverment's digital terrestrial problems.
The government had been expected to leave intact rules preventing him from getting a slice of the terrestrial pie, which he is particularly keen to do as subscriptions to BSkyB are expected to soon level out.
The potential merger between Carlton Communications and Granada has also finally been given the go-ahead, as media ownership laws that have so far prevented it will be scrapped under the new bill.
The news will come as a welcome view to Granada and Carlton, which were thought to have restarted merger talks last week following the demise of ITV Digital.
Jowell said: "It makes no sense that French, Italian or German companies can own TV and radio licences but Canadian, Australian or US companies can not. The resultant inward investment should allow the UK to benefit rapidly from new ideas and technological developments."
The government said it will also abolish rules banning newspaper owners from owning radio stations.
Jowell said that the government plans to remove most ownership rules within the TV, radio and newspaper market where competition law tends to encourage "dispersed ownership".
This will include simplifying the complex rules preventing consolidation among local radio stations, and lifting the ban on owning more than one national commercial radio licence.
Jowell said the government would leave three overall rules in place to "retain minimum guarantees of plurality".
First of all, newspaper groups with more than 20% of the market would not be able to own a significant stake in ITV.
Secondly, a parallel 20% rule preventing a company with a dominant position in local newspapers owning regional ITV licences in one region or major city stay in place. This would stop Associated Newspapers, publisher of the Evening Standard, owning LWT in London.
Thirdly, a scheme will be implemented that will ensure that at least three commercial local or regional media platforms exist across newspapers, radio and TV in any local region, as well as the BBC.
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