Nick Clegg warned David Cameron about employing Andy Coulson because of concerns over phone hacking but was rebuffed.
The British deputy prime minister had raised concerns about employing Mr Coulson, a former editor of the 'News of the World' who had resigned after a series of revelations about phone hacking at the tabloid.
He is said to have been astonished when his concerns were brushed aside but felt powerless to change Mr Cameron's mind.
Chris Huhne, the energy secretary, disclosed that he had told Mr Clegg about the risks involved in hiring Mr Coulson and that he in turn had told Mr Cameron.
Mr Huhne said: "I certainly raised it with Nick and Nick raised it with the prime minister. It was very clear from what I said that big reputational risks were being run. Either Mr Coulson was complicit in criminal acts or he was an incompetent editor."
But Mr Cameron refused to heed the advice, making it clear that it was "a personal appointment of the prime minister, it was not a government appointment" and therefore his Liberal Democrat colleagues were not in a position to object.
Mr Cameron is facing fierce criticism for employing the ex 'News of the World' editor at Downing Street after he had been forced to resign from the tabloid when royal editor Clive Goodman was jailed for phone hacking.
Serious doubts were raised over his judgment after he insisted last week that he was right to give Mr Coulson a "second chance" and described him as a "friend".
On Friday, he said a company had run a "basic background check" on Mr Coulson before he was employed while the Tories were in opposition. He had received no "actionable" information about the former editor and was unaware of "specific" warnings.
But yesterday it emerged he was warned repeatedly not to hire the journalist, who was arrested on Friday over allegations of phone hacking and making illegal payments to the police.
Paddy Ashdown, the former Lib Dem leader, has also revealed that he had warned No 10 of the damage Mr Coulson's appointment could cause just days after the general election.
Mr Ashdown, who was a key player in the coalition talks with the Tories, said it was obvious from what he had been told that Mr Coulson's position as director of communications would be a disaster.
He said: "I warned No 10 within days of the election that they would suffer terrible damage if they did not get rid of Mr Coulson, when these things came out, as it was inevitable they would."
Mr Huhne blamed the UK prime minister's attitude on the cosy relationship he enjoyed with Rupert Murdoch and News Corps executives.
"The truth is that both Labour and the Conservatives over many years have had a very cosy relationship with the Murdoch press," he said.
"Hiring Mr Coulson was seen as a way in to getting a relationship with the Murdoch press. After all, the Murdoch press did back the Conservatives very vigorously during the general election campaign."
A source close to Mr Clegg said his warning had been of a "general" nature.