The London Oratory, an 11-18 Catholic boys' school in West Brompton, London, has been told it can select pupils for its new junior choir school on the basis of interviews.
Mrs Shephard has withdrawn a previous instruction to the school to comply with the regulations after discussions with the head, John McIntosh, a former adviser to the Government.
The school has attracted controversy because its existing method of selection allows it to take pupils from as far away as Hertfordshire and Kent. Pupils are admitted on the basis of an interview designed to assess whether the aims, attitudes and values of parents are in harmony with those of the school. The government guidelines, drawn up in 1993, expressly forbid selection procedures that involve an assessment that is subjective.
The Catholic diocese of Westminster has in the past queried the school's arrangements with the Department for Education and Employment (the school is run by a Catholic order and is not within the jurisdiction of the diocese) on the grounds that they breach the regulations.
In April this year the London Oratory was "reminded" of the guidelines and told that it would have to change the admission proposals put forward for the junior school.
However, the DFEE has now decided that it would "not be appropriate" for the school to have two different selection procedures and has agreed it can interview parents for 20 places a year available in the choir school that will open next September.
The DFEE said the selection procedure the department has accepted differs in "some respects" from the guidance. However, the department said, the guidelines are not statutory and there are special circumstances, namely that interviews are used as a means of selection in the senior school.
The Prime Minister indicated last week that he wants to change the rules to allow grant-maintained schools to determine their methods of selection without having to get the approval of the DFEE.
He told grant-maintained school heads and governors: "I know you are concerned about the way in which your admission arrangements that you had operated successfully in the local authority sector were called into question.
"I also understand your irritation as self-governing schools at having to apply to the DFEE for any change, however minor, in your admission arrangements and then sometimes being invited to make changes you didn't ask for."