David Cameron knew Jeremy Hunt was supportive of News Corporation's desire to takeover BSkyB when he appointed him to oversee the bid, the Leveson inquiry heard.
Hunt drafted a letter to Cameron in November 2010 warning the prime minister that blocking News Corporation's bid would cause the UK media sector to "suffer for years".
In his evidence to the Leveson inquiry on Thursday, Hunt's former special adviser Adam Smith revealed that Hunt had written to the prime minister while responsibility for adjudicating the bid still rested with business secretary Vince Cable.
The letter read: "James Murdoch is pretty furious at Vince's referral to Ofcom. He doesn't think he will get a fair hearing from Ofcom. I am privately concerned about this because News Corp are very litigious and we could end up in the wrong place in terms of media policy.
"Essentially what James Murdoch wants to do is to repeat what his father did with the move to Wapping and create the world's first multiplatform media operator available from paper to web to TV to iPhone to iPad.
"The UK has the chance to lead the way on this as we did in the 80s with the Wapping move but if we block it our media sector will suffer for years."
"In the end I am sure sensible controls can be put into any merger to ensure there is plurality but I think it would be totally wrong to cave into the Mark Thompson/Channel 4/Guardian line that this represents a substantial change of control given that we all know Sky is controlled by News Corp now anyway."
Cable was subsequently stripped of responsibility for taking the decision after he was secretly filmed expressing opposition to Murdoch - and therefore deemed not to be impartial.
Cameron then handed responsibility to culture secretary Hunt.
Smith told the Leveson inquiry that he did not believe the culture secretary was "particularly" close to the Murdoch family.
"He didnt really have that much fo a relationship with either of the Murdochs or the chief executive of News International [Rebekah Brooks] he tended to deal, as I think inquiry saw with Mr Michel," he said.
"I wouldnt have said he was particuarly close to News Corporation."
Downing Street said in a statement that the memo sent by Culture Secretary Jeremy Hunt to David Cameron regarding the BSkyB bid was "entirely consistent with his public statements on the BSkyB bid prior to taking on the quasi-judicial role".
"It also makes clear that 'it would be totally wrong for the Government to get involved in a competition issue which has to be decided at arm's length,'" the statement continues.
"The PM has made clear throughout that he recused himself from decisions relating to BSkyB and did not seek to influence the process in any way."
A source close to Mr Hunt also said there was nothing in the memo that suggested he should not have been given the quasi-judicial function when it was stripped from Mr Cable in December 2010.
"Jeremy is clear in the memo, as he was throughout the bid process, that it should only go ahead if it addressed the plurality concerns," said the source.
Earlier in the day the inquiry heard from News Corp's chief lobbyist Fred Michel who addressed the over one thousand messages that passed between Hunt's office and News Corporation in the course of one year.
Smith described his role working for Hunt as a "buffer" between the secretary of state and outside organisations who wanted to contact him.
"A lot of outside organisations want to meet with secretaries of state, they dont have the time to meet with everybody ... so I would often have contact with them to see if what they had to say was of interest."
Smith quit his job working for the culture secretary after admitting he had "inappropriate" contact with News Corporation during the time Hunt was charged with adjudicating on the company's bid for BSkyB.
Labour leader Ed Miliband has said he believes Smith is acting as a fall guy for the culture secretary.
"The idea that his special adviser, Adam Smith was acting as some lone wolf callusing with News Corporation, helping them on their bid for BSkyB, providing information to them that was going to be disclosed to government, giving them information to them about opposition to the bid was saying, without any knowledge of the Secretary of State, frankly beggars belief," he said in April.