The action follows the recommendation of the FDA's outside advisory panel. The panel last July voted 22-1 against removing the drug from the market, but said the drug's label should carry a stronger warning.
Janet Woodcock, acting director of the FDA's Center for Drug Evaluation and Research, said the agency has now formally decided not to ban Avandia.
"We are keeping Avandia on the market because we have concluded there isn't enough evidence to determine that Avandia is more risky than other treatments for type 2 diabetes," Woodcock said at a news conference.
The FDA decision against an Avandia ban came after a split vote from its own internal safety review board.
While she declined to say how close the vote was, Woodcock said a majority of the safety board agreed to keep the drug on the market as long as its black-box label -- the FDA's strongest warning -- is updated.
In August, the FDA announced that all thiazolidinedione diabetes drugs -- the class of drugs including Avandia, Actos, Avandaryl, Avandamet, and Duetact -- would carry a black-box warning that the drugs may cause or worsen heart failure in some patients.
Avandia will now carry an additional black-box warning. The warning alerts patients and doctors to troubling but inconclusive evidence that the drug may increase a patient's risk of heart attack and angina (heart-related chest pain).
Definitive results of that trial would not be available until 2014, although interim data analyses could possibly spot serious problems before then.
Avandia's new label also notes that the drug is not recommended -- but not contraindicated -- for patients already taking insulin or nitrate drugs. This means that doctors may still prescribe Avandia for such patients if they feel the benefit outweighs the risk.
"Avandia remains a safe and effective medicine for most patients with type 2 diabetes when used appropriately," GlaxoSmithKline Chief Medical Officer Ronald Krall, MD, says in a news release.