The quango set up to oversee a state-backed system of press regulation is to rule on whether to give official recognition to a new watchdog supported by campaigners seeking tighter control of newspapers.
Impress, a regulator backed by the prominent Hacked Off campaigner Max Mosley, is seeking formal backing from the Press Recognition Panel (PRP) - which was set up in the wake of the Leveson Inquiry into press standards.
If it succeeds, Culture Secretary Karen Bradley will have to decide whether to activate regulations which could see newspapers face "exemplary" damages if they are sued for libel unless they agree to be regulated by Impress.
Triggering Section 40 of the Crime and Courts Act 2013 would mean any newspaper that refused to sign up could have to pay the legal fees of a complainant who sued them for libel, even if the paper won the case.
The move has angered many newspapers who have overwhelmingly rejected the idea of any form of state regulation, warning that it would undermine the whole principle of press freedom.
Many publications have joined the rival Independent Press Standards Organisation (Ipso) which has made clear from the outset that it would not seek recognition by the PRP.
Ipso chairman Sir Alan Moses said Section 40 was "designed to force, for fear of financial ruin, all printed media to submit to a regime which they have rejected".
Furthermore, the connection between Mr Mosley and Impress and the relationship it has with the PRP made it unsuitable as a candidate regulator, he said.
Appearing before the Commons Culture, Media and Sport Committee on Monday, Ms Bradley made clear she would be in no hurry to activate Section 40, even if Impress was recognised by the PRP.
While she said she had not ruled out activating Section 40 at some point in the future, she wanted to consider the options for achieving "appropriate levels of robust regulation ... outside the PRP".
She told MPs there were fears among local newspapers in particular that they could be forced out of business if the Government took an overly "ideological" approach to the issue.
"I could do an ideological position on this but the implications of being ideological on this may be that we see a vibrant free local press being affected," she said.
"It has been put to me very clearly by a number of editors of local newspapers that the exemplary damages section of Section 40 could see them being put out of business and certainly would impact on their ability to do investigative journalism.
"I want to consider those representations, consider them very carefully, and then make a determination. I am reserving judgment at this stage until I have had a chance to consider all the options."
Her comments were welcomed by Bob Satchwell, executive director of the Society of Editors, who said the royal charter system was "halfway to state control of the press" and called Section 40 a "draconian measure".
He told the Press Association: "It goes against all the principles of justice. The first principle of any justice system is that it should be fair.
"It's clearly unfair if somebody who takes action against a paper, the paper is found to have got the story right and the person who sued is totally wrong and may indeed have lied, he wouldn't face any costs because the paper would have to pay it. It's a nonsense."
However Evan Harris, joint executive director of Hacked Off, which campaigns for greater press regulation, insisted there should be no watering down of the Leveson recommendations.
"The Culture Secretary's suggestion that the Government might be satisfied by press self-regulation outside of the Leveson criteria if it was, in the Government's view, 'robust enough' would be a return to the Wild West days of the failed PCC (Press Complaints Commission), and decades of political-press back-scratching," he said.
"As long as politicians and press owners are judging press regulation, neither freedom of expression nor the public interest is safe."
In a letter to The Times Sir Alan said Section 40 was designed to "corral" publications into state regulation, adding: "Without the benefit of the Max Mosley family trust, Impress would not continue to exist and those few hyperlocals who have joined it would not be able to afford arbitration.
"The regional and local press do not want to be forced to arbitrate and Leveson never explained why they should be.
"The Max factor even wafts over the Press Recognition Panel itself. Its continuing viability depends on it recognising somebody; without Impress it has no one to recognise."