A literary prize for writers from ethnic minorities has been forced to include entrants of all colours after complaints that it discriminated against white writers.

Arts Council England and Penguin UK had to rewrite the rules a year after introducing the Decibel Penguin Prize, a short-story competition for British writers of Asian, African or Caribbean origin.

The Commission for Racial Equality (CRE) decided that the prize could breach Section 29 of the Race Relations Act. Had the rules not been changed, the watchdog could have begun legal proceedings against the organisers.

The Decibel Penguin Prize was set up to encourage diversity — even though Andrea Levy, who won the Whitbread with Small Island, and Zadie Smith, who shot to fame with her first novel, White Teeth, are among bestselling ethnic-minority writers who relied on talent rather than positive discrimination. Diran Adebayo, an acclaimed British writer of Nigerian parentage, argued recently that the quality of a book mattered more than whether its author happened to be black or Asian.

Julien Crighton, a businessman from Nottingham who lodged a complaint about the prize with the CRE, told The Times that it had seemed that Penguin “were being politically correct for the sake of being politically correct. Even though the intentions might be good, it doesn’t accomplish anything — particularly with public money being involved. If my children grew up to be writers they wouldn’t be part of it.”

Arts Council England has now confirmed that skin colour will not be a factor in future.

For the second year of the contest, the focus will be “personal stories of immigrants to the UK”. That way, a spokesman said, “the spirit” of the original prize can be retained.

Although the CRE said that the case was closed, the Arts Council spokesman seemed less sure. Acknowledging its acceptance of the CRE’s comments and that the rules had been changed, he said: “We understand that this is an area of the law which is open to interpretation and we are in ongoing discussions with the CRE.” He added: “We did check the situation beforehand. We believed we were acting lawfully, but they got in touch with us.”

In recent years the funding body has undertaken various initiatives intended to ensure that the arts reflect society’s diversity. It sees the Decibel prize as part of that work. The ten winners’ submissions appear in a Penguin anthology.

Penguin and David Lammy, the Culture Minister and the prize’s patron, who is black, declined to comment.

The Department for Culture, Media and Sport said: “We fully support initiatives to stimulate as wide a range of creative work as possible, from as wide a community as possible.”

Literary awards

The £60,000 Dylan Thomas Prize, the newest award, was founded last year to encourage writers under 30. The award, set up as part of a campaign by Wales to develop its cultural life in an international context, is open to all young authors writing in English

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