The BBC was accused of caving in to pressure and censoring the will of record-buyers after ruling that it would broadcast just five seconds of "Ding Dong! The Witch Is Dead" during Sunday's chart run-down.
Tony Hall, the new BBC Director-General, approved a "compromise" which will prevent the song, which is heading towards the number one slot after being adopted as a posthumous protest by opponents of Lady Thatcher, being aired in full by Radio 1.
Instead a five-second clip will be played during a special news report, broadcast during Sunday's Top 40 Chart Show, presented by Jameela Jamil, explaining why a song from 1930s film The Wizard Of Oz had made the charts. The song itself is only 51 seconds long.
Comment: Good old BBC, government mouthpiece since, well... forever!
Ben Cooper, Radio 1 Controller who made the announcement, said the decision was "a compromise and it is a difficult compromise to come to."
The executive said he has yet to decide whether the words "Ding dong the witch is dead" will actually appear within the report, which will explain to listeners why Lady Thatcher was so divisive and the subject of a "hate campaign".
Facing his first, full-brown "crisis" just ten days after taking over a BBC reeling from the Savile crisis, Lord Hall of Birkenhead took the final decision following an the internal debate over whether the song should be aired.
With 35,000 download sales by Friday, "Ding Dong" is heading for the top three and, as its notoriety increases, is now tipped for the top spot.
Former colleagues of Lady Thatcher, allied with newspapers most protective of her memory, said it would be "tasteless" and "offensive" for the BBC to play the song days before her funeral and urged a "ban".
"We have agreed that we won't be playing the song in full, rather treating it as a news story and playing a short extract to put it in context."
Under BBC guidelines, the corporation musn't air "anything that, in the light of events, might cause unjustifiable offence as judged against generally accepted standards."
But the BBC must also provide a factual account of the nation's weekly music choices. Executives asked whether the likely teenage audience for the Top 40 rundown would be offended.
As private hopes that the Judy Garland song would drift down the charts by Sunday faded, BBC executives came up with a compromise. A Newsbeat reporter might explain on-air why the song, not play-listed by Radio 1, was so high in the charts to the 16 to 24-year-olds listening, who would be too young to remember when Lady Thatcher was in office.
"I've therefore decided exceptionally that we should treat the rise of the song, based as it is on a political campaign to denigrate Lady Thatcher's memory, as a news story.
"To ban the record from our airwaves completely would risk giving the campaign the oxygen of further publicity and might inflame an already delicate situation."
The ban prompted a fresh Twitter campaign urging people to buy the song in defence of "free speech".
On tweet read: "I wasn't going to do it before but I am now going to buy #DingDong. The pathetic #BBC censorship is far worse than the song itself."
The compromise was an error, said Mark Stephens, the leading media lawyer, said: "I think they should play the song. She was a controversial figure and its chart position represents the views of a section of the community. It will undoubtedly cause offence to some people but probably not to the Radio 1 audience."
Nigel Farage, UKIP leader, said the campaign was distasteful but "if you ban a record you make a huge, huge mistake."
Andrew Collins, the Radio Times columnist, accused the BBC of "caving in" to outside pressure.
John Whittingdale MP, Chair of the Commons media select committee, backed the BBC compromise. He said: "I don't think it would have been right to have allowed the Chart Show to have been hijacked for political purposes and had they played the whole song that would have been the consequence."
Senior BBC executives believed that a ban could leave the corporation vulnerable to future cases where special interest or religious groups may call for broadcasts to be banned on grounds of taste.
Lord Hall will hope to escape further controversy after taking steps to ensure the BBC's coverage of Lady Thatcher's funeral does not repeat the mistakes of the last ceremonial occasion that the corporation covered, the Diamond Jubilee Thames flotilla.
Veteran David Dimbleby, who led the BBC's coverage of Princess Diana's funeral in 1997 and the Queen Mother's funeral in 2001, will anchor the three-hour BBC1 broadcast, from a studio overlooking St Paul's Cathedral.
Dimbleby will wear black tie, the BBC said, in contrast to the BBC news presenters including Huw Edwards, who reported Lady Thatcher's death and Sky News' anchor for the funeral, Dermot Murnaghan, who will wear "sombre" attire but not black tie.
Tess Daly and Fearne Cotton, criticised for their role in the "lightweight" flotilla coverage, will not speak to the crowds lining the route on this occasion. BBC News anchors Sophie Raworth and Mishal Husain will provide the additional reporting.
Whilst the BBC will cover the funeral procession leaving the Palace of Westminster to the end of the service at St Paul's Cathedral, ITV will rely on This Morning presenters Holly Willoughby and Phillip Schofield to guide its viewers through the key moments of the morning's ceremonial events.