21 December 2010 Last updated at 13:05 ET
Mr Cable told undercover reporters he planned to block the takeover.
Downing Street said David Cameron believed Mr Cable's comments about Mr Murdoch were "totally unacceptable and inappropriate".
A spokesman said: "Following comments made by Vince Cable to the Daily Telegraph, the prime minister has decided that he will play no further part in the decision over News Corporation's proposed takeover of BSkyB.
"In addition, all responsibility for competition and policy issues relating to media, broadcasting, digital and telecoms sectors will be transferred immediately to the Secretary of State for Culture, Media and Sport.
"This includes full responsibility for Ofcom's activities in these areas.
"The prime minister is clear that Mr Cable's comments were totally unacceptable and inappropriate."
The business secretary's comments on Rupert Murdoch came in unpublished parts of a Daily Telegraph probe seen by the BBC.
According to the transcript seen by the BBC's business editor, Mr Cable said: "I am picking my fights, some of which you may have seen, some of which you may haven't seen.
"And I don't know if you have been following what has been happening with the Murdoch press, where I have declared war on Mr Murdoch and I think we are going to win."
'Legal question' News Corporation, which is run by Rupert Murdoch, already owns 39% of BSkyB but wants to buy up the remaining 61% for £7.8bn.
The group also owns News International - whose publications The Sun, News of the World, The Times and The Sunday Times account for a third of the UK's national newspaper circulation.
A spokesman for News Corporation said: "News Corporation are shocked and dismayed by reports of Mr Cable's comments. They raise serious questions about fairness and due process."
In the transcript, Mr Cable tells the undercover reporter: "Well I did not politicise it, because it is a legal question... but he (Mr Murdoch) is trying to take over BSkyB - you probably know that."
The reporter says: "I know vaguely".
Cable: "With considerably enhanced..."
Reporter: "I always thought that he had BSkyB with Sky anyway?"
Cable: "No, he has minority shares and he wants a majority - and a majority control would give them a massive stake.
"I have blocked it using the powers that I have got and they are legal powers that I have got. I can't politicise it but from the people that know what is happening this is a big, big thing.
"His whole empire is now under attack... So there are things like that we do in government, that we can't do... all we can do in opposition is protest."
EU clearance Robert Peston said the transcript had been passed to him by a whistleblower upset that The Daily Telegraph had not published it in full.
In extracts already published by the newspaper, Mr Cable revealed his concerns about the coalition to reporters posing as constituents.
Mr Peston said the Telegraph had chosen not to publish the "most explosive" part of the investigation, relating to the BSkyB takeover, but a spokesman for the newspaper said: "We have made clear both in the paper today and in interviews that we will be publishing further comments in the forthcoming days."
Joaquin Almunia, EC vice-president and commissioner for competition, said: "I am confident this merger will not weaken competition in the UK. The effects on media plurality are a matter for the UK authorities."
Ofcom must decide by 31 December whether to refer the bid to the Competition Commission - but the final decision on blocking it would have rested with Mr Cable, who as business secretary had a quasi-judicial role in the process.
Writing in his blog, Mr Peston said: "The Telegraph has been a leading opponent of News Corporation's attempt to acquire the whole of BSkyB. In October, the Telegraph's chief executive, Murdoch MacLennan, signed a letter - along with senior executives of the BBC, Channel 4, the Daily Mail and Trinity Mirror - asking Mr Cable to consider blocking the takeover.
"The disclosure of Mr Cable's private views on Mr Murdoch and the proposed takeover of BSkyB makes it extremely difficult for him to fulfil his role as the ultimate arbiter of whether the deal should proceed under the 2002 Enterprise Act.
"News Corporation is bound to challenge his impartiality."
Media commentator Steve Hewlett said Mr Cable's words could have fatally undermined his position in government.
"You can not really be a minister and behave like that," he told the BBC News channel.
But Lib Dem peer Lord Razzell said Mr Cable was simply using a "rather hyperbolic" and "boastful" way of describing the referral of the takeover to Ofcom and it did not mean he should be sacked.
Vince Cable to stay on as Business Secretary
Business Secretary Vince Cable will stay in cabinet despite "declaring war" on Rupert Murdoch, says Downing Street.
But he will be stripped of his powers to rule on Mr Murdoch's bid to take control of BSkyB, which will be handed to Culture Secretary Jeremy Hunt.Mr Cable told undercover reporters he planned to block the takeover.
Downing Street said David Cameron believed Mr Cable's comments about Mr Murdoch were "totally unacceptable and inappropriate".
A spokesman said: "Following comments made by Vince Cable to the Daily Telegraph, the prime minister has decided that he will play no further part in the decision over News Corporation's proposed takeover of BSkyB.
"In addition, all responsibility for competition and policy issues relating to media, broadcasting, digital and telecoms sectors will be transferred immediately to the Secretary of State for Culture, Media and Sport.
"This includes full responsibility for Ofcom's activities in these areas.
"The prime minister is clear that Mr Cable's comments were totally unacceptable and inappropriate."
The business secretary's comments on Rupert Murdoch came in unpublished parts of a Daily Telegraph probe seen by the BBC.
According to the transcript seen by the BBC's business editor, Mr Cable said: "I am picking my fights, some of which you may have seen, some of which you may haven't seen.
"And I don't know if you have been following what has been happening with the Murdoch press, where I have declared war on Mr Murdoch and I think we are going to win."
'Legal question' News Corporation, which is run by Rupert Murdoch, already owns 39% of BSkyB but wants to buy up the remaining 61% for £7.8bn.
The group also owns News International - whose publications The Sun, News of the World, The Times and The Sunday Times account for a third of the UK's national newspaper circulation.
Continue reading the main story
“Start Quote
End Quote Vince Cable on Rupert MurdochHis whole empire is now under attack”
Mr Cable ordered Ofcom to investigate the proposal over concerns about press freedom and consumer choice - but he was to have the final say and has stressed the need to be politically impartial.
Labour called on him to step aside immediately from any decision to do with BskyB. Shadow business secretary John Denham told the BBC it was "difficult" to see how Mr Cameron and Mr Clegg could continue to have confidence in him. A spokesman for News Corporation said: "News Corporation are shocked and dismayed by reports of Mr Cable's comments. They raise serious questions about fairness and due process."
In the transcript, Mr Cable tells the undercover reporter: "Well I did not politicise it, because it is a legal question... but he (Mr Murdoch) is trying to take over BSkyB - you probably know that."
The reporter says: "I know vaguely".
Cable: "With considerably enhanced..."
Reporter: "I always thought that he had BSkyB with Sky anyway?"
Cable: "No, he has minority shares and he wants a majority - and a majority control would give them a massive stake.
"I have blocked it using the powers that I have got and they are legal powers that I have got. I can't politicise it but from the people that know what is happening this is a big, big thing.
"His whole empire is now under attack... So there are things like that we do in government, that we can't do... all we can do in opposition is protest."
EU clearance Robert Peston said the transcript had been passed to him by a whistleblower upset that The Daily Telegraph had not published it in full.
In extracts already published by the newspaper, Mr Cable revealed his concerns about the coalition to reporters posing as constituents.
Mr Peston said the Telegraph had chosen not to publish the "most explosive" part of the investigation, relating to the BSkyB takeover, but a spokesman for the newspaper said: "We have made clear both in the paper today and in interviews that we will be publishing further comments in the forthcoming days."
Continue reading the main story 
Vince Cable's remarks shed new light on the campaign to block News Corporation's full takeover of BSkyB.
On the day the bid was announced in June, most commentators thought it would go ahead without much difficulty, subject to agreement on price.
BSkyB was already seen by Government and regulators as part of the Murdoch empire, even though News Corp held only 39 per cent of the shares.
Rupert Murdoch set up Sky. When he merged it with British Satellite Broadcasting in 1990 he still had a controlling stake and he was BSkyB's chairman for many years, followed by his son James.
Only in September did a campaign begin in the press and parliament arguing that the Murdoch empire would have even more power if it owned all the BSkyB shares.
Did Mr Cable play a part in that? His statement that "I have declared war on Mr Murdoch and I think we are going to win" suggests he might have done.
Analysis
On the day the bid was announced in June, most commentators thought it would go ahead without much difficulty, subject to agreement on price.
BSkyB was already seen by Government and regulators as part of the Murdoch empire, even though News Corp held only 39 per cent of the shares.
Rupert Murdoch set up Sky. When he merged it with British Satellite Broadcasting in 1990 he still had a controlling stake and he was BSkyB's chairman for many years, followed by his son James.
Only in September did a campaign begin in the press and parliament arguing that the Murdoch empire would have even more power if it owned all the BSkyB shares.
Did Mr Cable play a part in that? His statement that "I have declared war on Mr Murdoch and I think we are going to win" suggests he might have done.
Senior cabinet ministers, including Prime Minister David Cameron, Chancellor George Osborne and Deputy Prime Minister and Lib Dem leader Nick Clegg are met in Downing Street deciding what action to take after the news broke at 1500 GMT.
It comes as News Corporation's bid for full control of BSkyB was cleared by the European Commission. Joaquin Almunia, EC vice-president and commissioner for competition, said: "I am confident this merger will not weaken competition in the UK. The effects on media plurality are a matter for the UK authorities."
Ofcom must decide by 31 December whether to refer the bid to the Competition Commission - but the final decision on blocking it would have rested with Mr Cable, who as business secretary had a quasi-judicial role in the process.
Writing in his blog, Mr Peston said: "The Telegraph has been a leading opponent of News Corporation's attempt to acquire the whole of BSkyB. In October, the Telegraph's chief executive, Murdoch MacLennan, signed a letter - along with senior executives of the BBC, Channel 4, the Daily Mail and Trinity Mirror - asking Mr Cable to consider blocking the takeover.
"The disclosure of Mr Cable's private views on Mr Murdoch and the proposed takeover of BSkyB makes it extremely difficult for him to fulfil his role as the ultimate arbiter of whether the deal should proceed under the 2002 Enterprise Act.
"News Corporation is bound to challenge his impartiality."
Media commentator Steve Hewlett said Mr Cable's words could have fatally undermined his position in government.
"You can not really be a minister and behave like that," he told the BBC News channel.
But Lib Dem peer Lord Razzell said Mr Cable was simply using a "rather hyperbolic" and "boastful" way of describing the referral of the takeover to Ofcom and it did not mean he should be sacked.
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