Murdoch has been under increasing pressure over News Corporation's UK publishing arm News International's handling of the phone hacking scandal and it emerged earlier today that he would step down from his position as Sky chairman.
The resignation comes ahead of the publication of the Commons Culture, Media and Sport select committee's report on phone hacking, which is expected to criticise the conduct of senior News International executives.
In a letter to the Sky board that set out the reasons for his resignation, Murdoch said he believed his resignation will "help to ensure that there is no false conflation with events at a separate organisation".
Murdoch will be replaced by deputy chairman and senior independent non-executive director Nicholas Ferguson, although he will remain on the board as a non-executive director.
Tom Mockridge, chief executive of News International and a non-exec director of Sky since 2009, has been appointed as deputy chairman.
Andrew Higginson, chief executive of retailing services and group strategy director of Tesco and a director of Sky since September 2004, will replace Ferguson as senior independent non-executive director.
Ferguson said: "The Board's support for James and belief in his integrity remain strong. We understand his decision to step aside at this time and we both welcome and look forward to his continued contribution as a non-executive director.
"The entire Board and management remain fully focused on maintaining BSkyB's strong progress, delivering an outstanding service for customers and creating value for all shareholders."
Murdoch, who is deputy chief operating officer of News Corporation and chairman and chief executive of News Corporation International, stepped down from his position of executive chairman at News International in February.
News Corporation owns 39.1% of Sky and was set to buy the remainder of the company in July 2011 when it pulled out of the deal amidst public and political opposition following the hacking scandal.
In a joint statement, Rupert Murdoch, chairman and chief executive of News Corporation, and Chase Carey, president and chief operating officer, News Corporation, said they were "grateful" for James Murdoch’s leadership of Sky.
The statement said: "He has played a major role in propelling the company into the market-leading position it enjoys today – and in the process has been instrumental in creating substantial value for News Corporation shareholders.
"We look forward to BSkyB's continued growth under the leadership of Nicholas Ferguson and Jeremy Darroch and to James’ continued substantial contributions at News Corporation."
Full letter from James Murdoch to the Board of BSkyB
As you know, my actions as a Director of BSkyB have been governed at all times by what is in the best interests of the Company, its customers and its shareholders. I have been privileged to serve first as chief executive and then as chairman of this outstanding company and I am proud of what we have achieved over this period. We have invested to create choice for many millions of customers, grown our contribution to life in the UK and significantly increased returns for shareholders.
I have now decided that this is the right time for me to step aside as chairman and, with the support of the Board and shareholders, continue to serve the company as a non-executive director. As attention continues to be paid to past events at News International, I am determined that the interests of BSkyB should not be undermined by matters outside the scope of this company.
I have been transparent in my evidence and have behaved ethically at all times. However, there continues to be extensive and voluminous commentary around these matters. I am aware that my role as chairman could become a lightning rod for BSkyB and I believe that my resignation will help to ensure that there is no false conflation with events at a separate organisation.
BSkyB is a great success story and its positive contribution to British broadcasting, and to the country more broadly, should not be questioned. With a strong Board and outstanding management team, I am confident that the Company will achieve even more in the future. I look forward to making a continued contribution in my role as a non-executive director.
Statement from Rupert Murdoch, chairman and chief executive of News Corporation and Chase Carey, president and chief operating officer, News Corporation, regarding James Murdoch’s decision to step down as chairman of BSkyB
"We are grateful for James Murdoch’s successful leadership of BSkyB. He has played a major role in propelling the company into the market-leading position it enjoys today – and in the process has been instrumental in creating substantial value for News Corporation shareholders. We look forward to BSkyB's continued growth under the leadership of Nicholas Ferguson and Jeremy Darroch and to James’ continued substantial contributions at News Corporation."