Under mounting pressure for apparently breaching the code of conduct for ministers, Mr Blunkett announced last night that his three eldest sons had agreed to dispose of their shares in DNA Bioscience, where he was briefly a director.
The Conservatives claim there is a conflict of interest because the company is expected to seek contracts from the Child Support Agency, which comes under the remit of his department.
But a spokesman for Tony Blair said: "The Prime Minister believes no further action is needed and the matter is closed."
But Mr Blunkett's announcement failed to end the controversy. The Tories demanded a full inquiry into whether he had breached the ministerial code and said he should resign if he had done so.
Rumours swirling around Westminster that Mr Blunkett might have to quit the Cabinet for the second time in 10 months were fuelled when Mr Blair gave less than wholehearted support for the Work and Pensions Secretary.
He told a Downing Street news conference: "I do give him my confidence ... But I think that he should be allowed to get on with his job, which is very important, reforming and reshaping our welfare system." Some Labour MPs likened Mr Blair's remarks to a football club chairman's vote of confidence in a manager just before sacking him.
There are signs too that Mr Blunkett is losing the confidence of Labour MPs and fellow ministers, some of whom believe he cannot carry on in such a critical job. Peter Kilfoyle, a former minister, said the barrage of publicity surrounding Mr Blunkett could make it "untenable for him to remain in a senior position".
Some MPs said the latest row raised questions about Mr Blair's judgement in recalling Mr Blunkett to his Cabinet only five months after he resigned as Home Secretary following allegations that his staff fast-tracked a visa for the nanny of his former lover Kimberly Quinn, the publisher of The Spectator.
Mr Blunkett, who agreed last night's statement with the Prime Minister in talks at No 10, later sought to clear up some of the unanswered questions about the affair. His spokesman insisted that his family would make "no profit" on the disposal of the shares, details of which are still being finalised. He placed £15,000 of shares in trust for his sons, which could be worth up to £300,000 if the firm is floated on the stock market.
His statement also left unresolved the status of the ministerial code. The Independent on Sunday disclosed at the weekend that Mr Blunkett broke the rules by failing to consult the advisory committee which monitors such appointments. The body told him such an action was only "voluntary" but the code says former ministers taking outside jobs "should" consult the committee.
In a fresh twist last night it emerged that Mr Blunkett failed to consult the Government's official appointments watchdog when he took up a private sector post with the business consultants Indepen Consulting in January after resigning as Home Secretary.
Correspondence leaked to The Times showed the independent advisory committee on business appointments, chaired by Lord Mayhew, told Mr Blunkett three times that he should consult the committee about taking private sector work for two years after taking office.
A spokesman for Mr Blunkett said he had acknowledged already that, with hindsight, he should have consulted the committee.
Sir Gus O'Donnell, the Cabinet Secretary, will now issue new guidance to end the confusion.
Chris Grayling, the shadow Leader of the Commons, said: "We need a rapid inquiry into what has happened to clear the matter up once and for all. Until this takes place, the questions about Mr Blunkett's dealings will remain and his position will become increasingly untenable."
Mr Grayling said Mr Blunkett had showed a "monumental lack of judgement" by having private meetings with people whose family own the company. Tariq Siddiqi, whose wife Lucy owns the DNA testing firm, introduced Mr Blunkett to the estate agent Sally Anderson, with whom he had a relationship that he insists was "platonic" but she says was sexual.
David Laws, Work and Pensions spokesman for the Liberal Democrats, said Mr Blunkett had "used up eight of his nine lives" and any further blunders would make his position untenable.
Mr Blunkett insisted: "DNA Bioscience does not have any contracts with my department or the Child Support Agency. I have not made any representations to any government department or agency on behalf of DNA Bioscience since returning to government, nor have I provided any advice to the company"