Pageant bosses took the step of de-crowning her after she had sex with fellow contestant Alex Bowen on the ITV2 reality show.
Producers have now confirmed Zara has been told of their actions, and she has decided to stay on 'Love Island'.
A show spokesperson told Digital Spy: "Zara was informed of the news off camera this morning.
The Miss Great Britain Organisation decided to strip her of the title, which she won in September 2015, after being unable to condone her frisson with Alex.
A statement from them read: "Following recent actions within the ITV2 show ‘Love Island’ it is with deep regret that we… have to announce that Zara Holland has been formally de-crowned as Miss Great Britain 2015/6.
“As an organisation we have not taken this decision lightly, we are close to all of our winners and wherever possible stand by them during their reign. That said, we feel we have no decision but to make this decision under the current circumstances.”
They continued: "The feedback we have received from pageant insiders and members of the general public is that we cannot promote Zara as a positive role model moving forward.
“We wholly understand that everyone makes mistakes, but Zara, as an ambassador for Miss Great Britain, simply did not uphold the responsibility expected of the title.”
The morning after her frisson with Alex, Zara broke down in a conversation with one of her fellow contestants, tearfully admitting: “I wouldn’t even do that if I was in a couple with someone. I just feel like everyone’s going to judge me. But look it’s not like me at all, it’s so out of character.
‘Love Island’ continues on Friday (17 June) at 9pm on ITV2.
Tap the image below to launch the slideshow...