According to the Financial Times, the departure of Freudenstein, who has been with the corporation for six years and in his current role since 2000, has come as a shock because he had a major role in all key decisions, including sporting rights and development of high-definition television.
He was also seen as a strong candidate to succeed chief executive James Murdoch, should he move to a more senior role at the group's parent company News Corporation.
Freudenstein was a previous frontrunner for the role when it became vacant two years ago, but lost out to Murdoch.
It is understood Freudenstein will not leave until summer 2006 so he can oversee the launch of Sky's high-definition television service and the auction for Premier League football rights.
This latest development comes just three months after another high-profile executive within News Corp, Rupert Murdoch's son Lachlan, also quit to return to Australia to launch an as-yet-undisclosed new venture.
His New York-based post of deputy chief operating officer of News Corp included overseeing the New York Post and Fox Television.
It is not known what Freudenstein's plans are when he returns to Australia, or whether he will remain within the media industry.
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