Kim Howells, the competition minister, said he had decided not to ask the European Commission to refer the deal back to the UK for a Competition Commission inquiry.
Shares in both companies soared by up to 20 per cent on the news, which analysts said had removed a major hurdle to Airtours winning control of its target.
The news came just a day after Karel van Miert, EU Competition Commissioner, gave a strong hint that he would refer the case back to the UK if the Government asked him to do so.
The deal fell into Brussels' jurisdiction because of the size of the business outside the UK that the merged group would have.
Mr Van Miert told reporters on Tuesday there "could be a demand" from the UK to take the case back.
But Mr Howells said yesterday that he had decided not to put in a request, following the advice of John Bridgeman, the Director General of Fair Trading.
Mr van Miert will announce next month whether he has cleared the deal or has decided to launch an in-depth investigation that could take up to four months.
First Choice said: "The result of the Commission's phase one review is still to be announced and thus the outcome of the regulatory process remains unclear." If the UK had asked for jurisdiction, analysts said it would probably have led to a referral to the Competition Commission.
The combined group would own 34 per cent of the UK package travel industry - above the 25 per cent needed to trigger an inquiry - and just ahead of Thomson with 28 per cent, effectively creating a duopoly.
There is understood to be anger over the confusion caused by Mr van Miert's reported comments. Shares in First Choice slid 7 per cent and Airtours' by 1.5 per cent on Tuesday.
First Choice had agreed a pounds 1.4bn merger deal with Kuoni of Switzerland a month before Airtours launched its bid.
Airtours' bid is backed by 51 per cent of First Choice shares.