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LONDON (Reuters) - In an astonishing response to a scandal engulfing his media empire, Rupert Murdoch shut down the News of the World on Thursday, Britain's biggest selling Sunday newspaper.
As allegations multiplied that its journalists hacked the voicemails of thousands of people, from child murder victims to the families of Britain's war dead, the tabloid hemorrhaged advertising, alienated millions of readers and posed a growing threat to Murdoch's hopes of buying broadcaster BSkyB.
Yet no one, least of all the paper's 200 staff, was prepared for the drama of a single sentence that will surely go down as one of the most startling turns in the 80-year-old Australian-born press baron's long and controversial career.
"News International today announces that this Sunday, 10 July 2011, will be the last issue of the News of the World," read the preamble to a statement from Murdoch's son James, who chairs the British newspaper arm of News Corp.
Staff gasped and some sobbed as they were told of the planned closure of the 168-year-old title, the profits of whose final edition will go to charity.
"No one had any inkling at all that this was going to happen," said Jules Stenson, features editor of News of the World, outside the News International offices.
It seemed a bold gamble, sacrificing a historic title that is suffering from the long-term decline of print newspapers to stave off a threat to plans to expand in television: "Talk about a nuclear option," said a "gobsmacked" Steven Barnett, professor of communications at Westminster University.
But some analysts predicted Murdoch would make The Sun, the tabloid daily that is Britain's best-selling newspaper, a seven-day operation and that the demise of the News of the World would ultimately benefit News International's bottom line.
Nevertheless, Murdoch still faces pressure to remove his close confidante and top British newspaper executive Rebekah Brooks, a friend of Prime Minister David Cameron. Her editorship of the News of the World a decade ago is at the heart of some of the gravest accusations.
The scandal has tarnished Cameron, who picked as his communications director a former News of the World editor who resigned over the hacking affair. The Guardian newspaper reported on Thursday that the journalist, Andy Coulson, would be arrested on Friday. Police declined to comment.
Praising a fine muck-raking tradition at the paper, which his father bought in 1969, James Murdoch wrote in a statement to stunned staff that the explosion of a long-running scandal over phone hacking by journalists had made the paper unviable.
"The good things the News of the World does ... have been sullied by behavior that was wrong. Indeed, if recent allegations are true, it was inhuman and has no place in our company. The News of the World is in the business of holding others to account. But it failed when it came to itself."
It was unclear whether the company would produce a replacement title for the lucrative Sunday market, in which, despite difficult times for newspaper circulations, the News of the World is still selling 2.6 million copies a week.
One option, analysts said, might be for its daily sister paper the Sun to extend its coverage to a seventh day - an option that some commentators said was already in train.
The website www.sunonsunday.co.uk was registered on Tuesday this week but the party who registered it opted to keep their identity secret.
Stephen Adams, a fund manager at Aegon asset management, which is one of the biggest shareholders in BSkyB, told Reuters he saw News Corp's move as "something to restore or remedy a tarnished reputation for the News Corp group.
"But we also critically see it as a reflection of News Corp's desire to progress the BSkyB bid and have full ownership of the company."
Cameron's right of center government had already given an informal blessing to the takeover, despite criticism on the left that it gave Murdoch too much media power.
The storm of outrage at the News of the World turned attention on Cameron's own links to the paper and to other News Corp executives, including Brooks, a regular guest of the Camerons.
Growing popular and political anger over the phone hacking saga had fostered concerns among investors that there could be snags in securing final approval for the $14-billion bid.
Journalists said that an emotional editor Colin Myler had read out the announcement at the east London newsroom where Murdoch changed the face of British journalism in the 1980s by breaking the power of the printing unions.
"People are just in a complete state of shock," said one journalist who asked not to be named.
Asked how staff felt toward Brooks, the reporter said there was a sense of "seething anger" and "pure hatred" directed toward her: "We think they're closing down a whole newspaper just to protect one woman's job.
Opposition leader Ed Miliband said Brooks should go, echoing the view of the journalists' trade union. The union said some sub-editors at The Sun had walked out in support of their colleagues on Thursday evening.
However, James Murdoch made clear Brooks remained in place as chief executive, telling Sky News he was satisfied Brooks knew nothing of the crimes allegedly committed when she was editor.
One employee of the doomed paper told Reuters: "We didn't expect it at all. We had no indication. The last week has been tough. None of us have done anything wrong. We thought we were going to weather the storm."
One source at News International said the decision had been taken and acted upon with little delay.
Investigations into phone hacking at the News of the World have been bubbling for several years and until recently only celebrities and other well-known figures were believed to have been victims.
But the scandal exploded earlier this week after revelations an investigator working for the paper may have listened to -- and deleted -- the voicemail messages of a missing 13-year-old schoolgirl, later found murdered.
The scandal deepened on Thursday with claims News of the World hacked the phones of relatives of British soldiers killed in action in Iraq and Afghanistan. Britain's military veterans' association broke off a joint lobbying campaign with the paper and said it might join major brands in pulling its advertising.
Many of the paper's readers are ardent supporters of the armed forces so suggestions it may have hacked the phones of the families of grieving service personnel only further alienated a core readership already horrified by suggestions its reporters accessed the voicemails of missing children and bombing victims.
Shortly before the announcement the paper would be closing for good, advertising website Brand Republic said the paper had lost all advertising for this weekend's edition.
News Corp wants to buy out the 61 percent of BSkyB it does not already own. The government has said the News of the World case should not affect that. But U.S. shares in News Corp fell over 5 percent on Wednesday, though they recovered somewhat in a stronger general market on Thursday.
Formal approval for the deal had been expected within weeks after the government gave its blessing in principle. But it now seems unlikely for months, although officials denied suggestions that they were delaying a decision because of the scandal.
"The Secretary of State has always been clear that he will take as long as is needed to reach a decision. There is no 'delay' since there has been no set timetable for a further announcement," a government spokesman said. Some British media reported that a decision was now expected in September.
The main accusations are that journalists, or their hired investigators, took advantage of often limited security on mobile phone voicemail boxes to listen in to messages left for celebrities, politicians or people involved in major stories.
Disclosure that the practice involved victims of crime came when police said a private detective working for the News of the World in 2002 hacked into messages left on the phone of murdered schoolgirl Milly Dowler while police were still looking for her.
Police have also been criticized over allegations officers took money from the News of the World for information. London's Evening Standard newspaper said on Thursday that police officers took more than 100,000 pounds ($160,000) in payments from senior journalists and executives at the paper.
Analysts believe the global Murdoch empire, which includes Fox television and the Wall Street Journal, can weather a storm of reproach from advertisers, readers and politicians in Britain -- though there were signs of international ramifications.
In Murdoch's native Australia, the leader of the Greens party said he wants the government to examine the ramifications on Australia of the phone hacking scandal.
Writing by Alastair Macdonald and Jodie Ginsberg; Editing by Jon Boyle