Education Secretary Michael Gove has partially backed down over his decision to scrap the £162m Schools Sports Partnership in England.
He promised to salvage over £47m from his department budget to ensure the scheme, aimed at increasing competitive sport, survives until the summer.
Mr Gove said exercise helped a "rounded education", but Labour said he had made a "humiliating" climbdown.
Teachers and athletes mounted a strong campaign against the original decision.
Ministers had called the partnership scheme a "complete failure", arguing it had done too little to increase physical activity among young people.
The Schools Sports Partnership supports joint initiatives between primary, secondary and specialist state schools designed to increase sporting opportunities for children.
After the scheme goes in summer 2011, the government is promising that £65m will be available in 2011-12 and 2012-13 to ensure one PE teacher per school is released for a day a week to ensure efforts to boost competitive sports are "embedded".
In a statement, Mr Gove said: "I want competitive sport to be at the centre of a truly rounded education that all schools offer. But this must be led by schools and parents, not by top-down policies from Whitehall.
"It's time to ensure what was best in school sport partnerships around the country is fully embedded and move forward to a system where schools and parents are delivering on sports with competition at the heart."
Mr Gove added that he was "looking to PE teachers to embed sport and put more emphasis on competitions for more pupils in their own schools, and to continue to help the teachers in local primary schools do the same".
More than 70 top British athletes, including Olympic heptathlon champion Lewis and world diving champion Tom Daley, wrote to Mr Cameron saying that ending the partnerships was "ill-conceived" and risked efforts to deliver a "genuine legacy" from the 2012 London Olympics, in terms of encouraging sports participation.
BBC sports editor David Bond said the backlash had caught the government by surprise, adding: "Even after Cameron had signalled he was having a rethink, school children, head teachers and leading athletes kept up the pressure."
Andy Burnham, shadow education secretary, said the package put together "after weeks of scrabbling round for funding to save something it branded a 'complete failure', only raises one cheer at best".
He said there was not enough funding being provided and "we are still looking at the prospect of fewer children playing sport in the run up to the Olympics".
In the House of Commons, Labour MP Clive Efford urged Mr Gove to apologise for his earlier decision.
Shadow education minister Toby Perkins said the government had performed a "humiliating climbdown" following a "storm of protest".
But the education secretary said: "We have ensured that we are able to strip out the bureaucracy that characterised the worst of the last government's legacy, continuing and building on the best [of the old scheme]."