"I've always been a believer in second chances. Tara is good person. Tara has tried hard. Tara is going to be given a second chance," Trump announced at a press conference in New York on Tuesday.
He also announced that Conner planned to enter rehab.
The revelation came a day after Conner's 21st birthday and as press reports continued to surface about her alleged drug and alcohol abuse, indiscretions with men and her apparent lack of reliability when it came to showing up at Miss USA-related events.
Speaking at the conference, Conner, who erupted in tears, did not go into detail about the allegations against her but did admit to drinking while underage and to having "personal demons." She apologized for her behavior, especially if it hurt her parents, and thanked Trump for his compassion.
"In no way when I walked into the meeting with him did I think it would be possible to be given a second chance," Conner said of her discussion with Trump. "You know what (Trump) could have said – 'You're fired' – that's what everyone expected, including me."
Instead, Trump said that, indeed, he had expected to dismiss Conner, "but after speaking to her I saw not only a beautiful woman, but a beautiful heart. She really, really tried."
Commenting on her problems, Trump said only, "She left a small town in Kentucky and got caught up in the whirlwind we know is New York."
Had Conner's crown been removed, her replacement would have been Miss California Tamiko Nash, 27, who was named runner-up to Conner at the April 21, 2006, Miss USA Pageant.
Trump discussed Conner's behavior with PEOPLE on Monday night, saying, "It is a painful subject, and I am not at all happy about the situation. If it was at all possible, I wanted to protect Tara at what I know is a tough time for her."