Alan Johnson, the Education Secretary, last night abandoned plans to force faith schools to accept more pupils from non-religious backgrounds after furious protests from Catholics.
Mr Johnson announced last week that he wanted new legislation to force new faith schools to accept up to a quarter of pupils from other faiths or none.
But last night he dropped the plans, saying a voluntary deal had been reached with the Catholic Church, meaning his proposed laws were no longer necessary.
The Church of England has already said its new schools will admit up to 25 per cent of pupils from outside the faith - but said other religions should not be expected to offer the same commitment. Mr Johnson said: "I have listened carefully to colleagues on this issue and recognise that we all share the same goal for a more cohesive society where faith schools play an important part in building understanding and tolerance of other faiths and communities."
The agreement means that new schools would always meet the demand of Catholic families. However, it allows for more places to be created for non-Catholics.
Archbishop Vincent Nichols, chairman of the Catholic Education Service, said in a statement that the Catholic Church and the Government had come "to a broad agreement about how future Catholic schools could be planned in ways that ensure they always meet the needs of Catholic parents. This is of prime importance to Catholics and accepted by the Secretary of State."
Mr Johnson had planned an amendment to the Education Bill currently going through Parliament which required new faith schools to select up to 25 per cent of their intake from pupils of other faith backgrounds or those with no religious beliefs. However, the Catholic Church argued that Catholic children must not be denied a Catholic education because they had had to make way for pupils of other faiths.
Earlier this week, Archbishop Nichols wrote to all 2,075 Catholic schools in England urging them to lobby their MP to stop the legislation. He described the plans as "ill-thought out, unworkable and contradictory of empirical evidence".
Last night Mr Johnson said: "We have today exchanged letters with the Catholic Church setting out an agreed way forward to ensure that up to 25 per cent of places in new Catholic schools for pupils from other or no faith would be additional to the demand for faith places. The Church of England has already pledged to deliver the same for its new schools.
"As we now have the support of the two major faith organisations in the country for our proposed way forward, I do not feel the legislative route is necessary or appropriate and no longer propose to lay an amendment to the Education and Inspection Bill."
Canon John Hall, the Church of England's chief education officer, said: "This will be seen as a watershed moment, when public confidence in faith schools and their role in breaking down walls within communities has been affirmed."
Andrew Copson, education officer at the British Humanist Association, said: "Our fear is that this voluntary solution will turn out to be meaningless."
Nick Gibb, the Conservative schools spokesman, said: "It has always been our view that these issues are matters for schools themselves to decide."
Sarah Teather, the Liberal Democrat education spokeswoman, said: "It was clear that this was an ill thought-out, last-minute idea from the Government which they have now been forced to abandon."