An Army Board came to the decision because of what it called the "exceptional circumstances" of his conviction and sentence, which merited his retention in the forces, though he may not stay in the Parachute Regiment.
A decision on which unit the 26-year-old soldier, who is currently on leave, will serve with will be made after a period of retraining at Catterick.
Private Clegg was convicted of the murder of the joyrider, Karen Reilly, 18, after the car in which she was driven sped through an army checkpoint in Belfast causing him and his colleagues in the patrol to open fire.
His release this month sparked three days of rioting and the burning of hijacked vehicles as nationalists all over Northern Ireland expressed their outrage at his early release.
The decision to allow him to remain in the Army is bound to raise a further outcry, particularly while republican terrorist prisoners remain in jail despite 11 months of peace.
in the Province.
His release came after concerted campaign by numerous English newspapers concerned that he had been convicted while carrying out his duty under the stressful conditions of Belfast.
An MoD spokeswoman said: "Pte Clegg was informed that after consideration of the application for his discharge from the Army - which his commanding officer was obliged to initiate under Queen's Regulations - the Army Board decided that the circumstances of his conviction and sentence were exceptional and merited his retention in the Army."