Tony Blair has cleared Tessa Jowell of breaching ministers' code of conduct - because her husband did not tell her about a £344,000 gift he had received.
The prime minister has given Ms Jowell his full support
Cabinet Secretary Sir Gus O'Donnell said the culture secretary accepted her husband should have told her about it.
She would then have told her top civil servant about the gift - so complying with the code - Sir Gus's report says.
Mr Blair said she was not "in breach" of the code but Labour's Peter Kilfoyle said she should "consider" resigning.
Ms Jowell, the minister in charge of the winning London Olympic bid, issued a statement saying: "I have always discharged my responsibilities under the ministerial code in good faith."
Conservative MP Nigel Evans, whose request for a Commons debate on the ministerial code was rejected on Thursday, told BBC Radio 4's PM programme he was "absolutely staggered" by the report issued by Sir Gus O'Donnell.
He called it "a whitewash".
"The fact is that she knew what the code said. She should have told her husband what the code said. He should have told her about the substantial gift and she should have declared it," he said.
"The ministerial code is in tatters tonight unless she goes".
Italian prosecutors have been examining claims the £344,000 payment was made to Mr Mills, an international lawyer, in return for helpful testimony in a corruption probe into Italian premier and media magnate Silvio Berlusconi in 1997.
Mr Mills denied that the money came from Mr Berlusconi, saying it was from another client. Both he and Ms Jowell have denied any wrongdoing.
Ms Jowell was drawn into the affair after it emerged that she had co-signed a £408,000 loan taken out against the value of their house, which was paid off just weeks later, apparently using the Italian money.
She said it was not "unusual, improper or illegal" for her to take out a mortgage with her husband, and categorically denied that the money had come from Mr Berlusconi.
The ministerial code says gifts to ministers or their families should be notified to the permanent secretary - senior civil servant - in their department.
Ms Jowell told Sir Gus she had first become aware in August 2004 that her husband had received a sum of money in September 2000 "which he thought he had reasonable grounds to believe was a gift".
Sir Gus's investigation came after shadow Commons leader Theresa May asked him to look into whether Ms Jowell's alleged involvement had breached the ministerial code of conduct.
Labour MP Peter Kilfoyle, himself a former minister, said: "I think she's reached a point where she's got to consider resignation, frankly.
"You know, people out there view this in a rather different way than we do in here.
"The damage that's being done to herself and to the government is quite incredible, and I think she ought to reconsider her position."
Chairman of the Committee on Standards in Public Life, Sir Alistair Graham said the Cabinet Secretary was not the right person to investigate Ms Jowell's conduct.
He said the situation showed that the current regulations about investigating the conduct of ministers were "pretty bankrupt".
Asked about the finding that Ms Jowell simply had not been told about the loan in question, he said: "Yes and it took four years for the penny to drop about that.
"Well it's not up to me to comment on the fine print of these things. The Cabinet Secretary has investigated, reported to the prime minister, who's said there's been no breach of the code."
But Commons leader Geoff Hoon said Sir Gus had stated "categorically" that Ms Jowell had not breached the ministerial code.
Meanwhile, BBC correspondent Christian Fraser, in Italy, said Italian prosecutors had released documents showing Mr Mills had used his wife's cabinet position and his friendship with Tony Blair to seek approval in Dubai.
In an application to practise in the United Arab Emirates, sent four months ago, he tried to reassure financial authorities they had no reason to worry about the ongoing investigation in Italy.
The letter reads: "You will know that I'm married to a minister in the government of this country and that in itself has caused a great deal of unwelcome publicity about this case.
"But I also want you to know, I have a lot of support and sympathy from very many people in public life, from the prime minister down."
What is your reaction to this news?
If the ruling is based on an assertion that Ms Jowell did not ask where the money was coming from - surely the next question should have been: "Why did you not ask?" All very convenient. It stinks.
Back in prehistory the Tories lost an election they should have won because John Major did not clean up real, or potential, corruption in his party. The stigma remains today. Tony Blair is in danger of doing the same thing. Sadly, whether the family are guilty or innocent does not matter here. Blair needs to be seen to be strong and not always dismissive, and here he appears to be failing. Surely a temporary suspension, however phrased, could keep he public happy and Ms Jowell employed, now we are left with doubts about all of them.
Stephen Lloyd, London UK
The fact that Tony Blair thinks that his judgement in this matter will be final indicates that his arrogance knows no bounds. What a low opinion of this country he must have.
David Hulse, Llandudno
This has all the obvious ingredients of a story which will simply not go away. What is really extraordinary though is that Tony Blair has unequivocally nailed his colours to the mast. This could be a life-changing move on his part.
Dan Jones, UK
Tessa Jowell may be cleared but the facts of the case are pretty sordid no government minister can be associated with them no wonder people have become disillusioned with politics.
Mike Walsh, Cirencester, UK
The unreasonable judgement that a husband and wife would not discuss a "Gift" or earnings of three times those of the wife's is ludicrous. The judgement serves to confirm the lack of faith the public has in politicians and lawyers in all political parties. If she didn't question it, what hope as a Minister of the UK? She and those who support must go to restore credibility to the political process.
John Sharpley, St Andrews, UK
As I recall, at the end of the Tories' stint in power Labour made a big deal about sleaze and corruption and how it must not be tolerated. Power corrupts.
Nick, Christchurch, UK
Tessa Jowell may not be corrupt. But her admitted conduct reveals her to be greedy and arrogant - and sadly all to typical of the Blair government.
David McDougall, Wadhurst, UK
If ministers have to abide by the code then they should check everything before signing it, even if it's their husband or wife that's asking.
Steven Walker, Manchester
Are we, the public, really expected to believe that Tessa Jowell's husband, apparently an intelligent international lawyer, didn't tell his wife he had been given £344,000 as a gift! I consider my intelligence totally insulted by this report.
Graham, London, UK
Blunkett deja vu. I can't believe these people keep trotting out the excuse that they "didn't know" about something fishy going on. They are in a position of authority and if they don't know - I'm sorry - they should just go.
Grant Stuart, Melton Mowbray, UK
Still, with the "full confidence of the Prime Minister" the end must be near.
Dermot Doran, Amsterdam, The Netherlands
How large a sum of money would have to change hands before it would be seen as 'not a gift'? Is it seen as normal for MPs and their spouse to receive gifts of £344,000?
John Green, Horley, UK
This government seems not to understand why voters are turned off in increasing numbers - we don't trust you. This comes at a time when the Inland Revenue is talking about clamping down on tax avoidance schemes - it's priceless, it really is!