Foreign student numbers will now be presented separately in total immigration figures, following complaints that the Government's crackdown on non-EU arrivals is deterring people from attending university in Britain.
The rethink is a victory for Liberal Democrat ministers led by Vince Cable, the Business Secretary, who have backed calls by 70 universities for lucrative overseas students to be removed from immigration statistics.
The announcement came as a leading vice-chancellor accused Britain of failing to treat like human beings more than 2,500 overseas students threatened with deportation at London Metropolitan University (LMU). Professor Eric Thomas, vice-chancellor of Bristol University and president of Universities UK, told his body's annual conference at Keele University: "Let us all ponder on how we would have reacted if that had happened to our sons and daughters in a foreign country."
University leaders claim many non-EU students are being put off by new visa rules and are heading to countries such as the US, where they are regarded as temporary residents and are not counted as immigrants.
David Willetts, the Tory Universities Minister, said: "Transparency in the immigration statistics is vital. We therefore want to publicise disaggregated figures so that the debate can be better informed.
"There is no limit on the number of legitimate students from overseas studying at British universities. The vast majority of international students are here legitimately, study hard, contribute to our economy, and take nothing from us except a world-class education."
Theresa May, the Home Secretary, had rejected demands for US-style exemption in the UK. Net immigration is running at more than 200,000 a year, despite a Tory election pledge to cut it to below 100,000.
But vice-chancellors and university lecturers said the move did not go far enough. Sally Hunt, the general-secretary of the University and College Union, said: "Simply providing a mechanism to count overseas students does not remove them from net migration figures."
Mr Willetts announced a £2m hardship fund to help "legitimate overseas students" at LMU, who face extra costs after the UK Border Agency's decision to remove its licence to sponsor foreign students.
Universities suffer a drop in applicants
Fewer students will go to university this year than last following the drop in the A-level pass rate, the Universities Minister David Willetts said.
Predictions that there would be 85,000 candidates snapping up places reserved for students with two A grades and a B have proved to be optimistic with the eventual figure likely to be about 80,000.
Even some of the most selective universities have had difficulties in filling places because, under the new admissions policy, universities cannot make up for a shortfall in AAB students by recruiting candidates with lower grades.