LONDON (Reuters) - Police arrested David Cameron's former spokesman on Friday over the scandal that has shut down Rupert Murdoch's News of the World, forcing the prime minister to defend his judgment while promising new controls on the British press.
As Cameron fielded hostile questions over why he had hired the paper's former editor Andy Coulson in 2007, despite knowing that one of his journalists had been jailed for hacking into voicemails in search of scoops, Coulson was being arrested by police on suspicion of conspiring in the illegal practice.
Cameron said he took "full responsibility" for his decision to appoint Coulson, who quit Downing Street in January when police relaunched inquiries. But the premier rebuffed criticism and strove to spread the blame for an affair that has generated public outrage against the press, politicians and police.
"Murder victims, terrorist victims, families who have lost loved ones in war..." he said: "That these people could have had their phones hacked into in order to generate stories for a newspaper is simply disgusting."
So widespread was the rot, Cameron told an emergency news conference after Murdoch dramatically shut down his best-selling Sunday paper, that only a completely new system of media regulation and a full public inquiry into what went wrong over a decade at News of the World and beyond would meet public demand.
"This scandal is not just about some journalists on one newspaper," Cameron said. "It's not even just about the press. It's also about the police. And, yes, it's also about how politics works and politicians too."
Underlining the seriousness of the threat facing Murdoch's empire, the Financial Times newspaper reported that the media baron would fly to London to handle the crisis. A spokeswoman for Murdoch's News International company declined to comment.
Other newspapers, to be published on Saturday, claimed that at least one executive at the company may have deleted millions of emails related to police investigations into phone hacking, a charge the spokeswoman said was "rubbish."
"We are cooperating actively with police and have not destroyed evidence," she said.
In a sign of spreading fallout, police said they had arrested a 63-year-old man in Surrey in southern England over allegations of inappropriate payments to police. A police spokesman said the man was not a serving policeman.
News of the World and other newspapers have been accused of paying the police for information.
Police also raided another tabloid, the Daily Star, earlier on Friday over allegations of phone hacking.
While defending himself for hiring Coulson, Cameron said politicians of all parties had been in thrall to press barons for decades. He indicated a new assertiveness toward the Murdoch empire by withholding overt endorsement of News Corp's controversial bid for British broadcaster BSkyB.
Shares in the pay-TV chain fell 7.6 percent after the media ministry also said it would take events at the News of the World into account before giving its approval to the takeover. News Corp shares in New York lost around 4 percent.
Cameron's opponents on the left want to block the $22-billion bid for the 61 percent of BSkyB that he does not already own on the grounds it would give Murdoch too much political clout. The day's events created new uncertainties for investors who had welcomed the government earlier giving its blessing.
In a mark of the drama of larger-than-life personalities at play, Cameron also criticized his friend and neighbor Rebekah Brooks, Coulson's predecessor as editor and now a top executive and confidante of Murdoch. She should have resigned herself, he said, after closing down the newspaper at a cost of 200 jobs.
Cameron told reporters he had heard that Brooks offered her resignation. "I would have taken it," he said.
Journalists putting together the final edition of the 168-year-old title, Britain's biggest-selling Sunday paper, had an emotional, sometimes angry, meeting with Brooks, who told them, according to a staffer who was present, that the News of the World brand had become "toxic." Advertisers and readers baled out following allegations this week of serial phone hacking.
But the 43-year-old, whose mane of red hair, sharp wit and seemingly charmed relationship with the 80-year-old Australian-born media mogul have long made her an object of fascination for fellow tabloid journalists, made clear she was staying on to manage News International, Murdoch's British newspaper arm.
Brooks denied the company, which many assume will soon fill the gap left by the News of the World by extending publication of the Sun daily to Sundays, was simply combining a useful cost-saving measure with a theatrical attempt to remove a threat to its expansion in television.
She has denied knowing that journalists on the paper were hacking the voicemails of possibly thousands of people. But she has become the focus of anger among the 200 News of the World staff sacked by Murdoch's son James with little ceremony.
There was "seething anger" and "pure hatred" directed toward her, one reporter said: "We think they're closing down a whole newspaper just to protect one woman's job."
Fellow journalists saluted the end of a venerable, muckraking title: "Hacked To Death" headlined Murdoch's own Times. "Paper That Died Of Shame" said the tabloid Daily Mail.
Cameron, who worked in public relations before being elected, faced his stiffest questioning over his association with Coulson, 43. He was hired to bring a feel for what grass-roots electors wanted to hear from the wealthy Cameron and his privately-educated fellow Conservative leaders.
"Very bad things had happened at the News of the World. He had resigned. I gave him a second chance," Cameron said of hiring Coulson in 2007. "I wasn't given any specific sort of actionable information about Andy Coulson."
Critics pointed out that many British journalists doubted Coulson's assertions that he, as News of the World editor from 2003, had known nothing of the hacking of phones used by aides to Prince William -- for which the paper's royal correspondent Clive Goodman and a private detective were jailed in 2007.
"I thought we had a prime minister today who showed he doesn't get it. He doesn't get it over BSkyB," said Miliband, who wants the bid blocked. "He also doesn't get it on Andy Coulson ... He's got to come clean and he has got to apologize."
Alan Rusbridger, editor of the left-leaning Guardian which has campaigned to expose more of the scandal, told Reuters Cameron could be faulted on Coulson: "I just wonder what vetting process was done. I think it shows extremely poor judgment."
Nonetheless, with probably nearly four years until a general election, the pain for Cameron may well be limited.
"It will damage him, but it won't sink him," said Tim Bale, professor of politics at the University of Sussex. "I think the Conservative Party will rally round him but he has been damaged and his judgment has been called into question."
Andrew Russell, senior lecturer in politics at Manchester University, said the normally confident Cameron looked awkward when questioned about Coulson: "He seemed to have a slippage of authority, he seemed rather uncomfortable," he said, but adding it was not a "Nixon and Watergate" moment for his leadership.
Miliband, and Cameron's Liberal Democrat deputy prime minister, Nick Clegg, offered broadly similar prescriptions for addressing what many Britons believe is a tabloid press out of control in its readiness to invade other people's privacy.
But media and civil liberties groups will resist efforts to impose regulation they believe would curb free speech or thwart scrutiny of corruption and hypocrisy.
Cameron said a system under which publishers supervise their own code of conduct must be tightened. He said an independent panel could start work within months -- much sooner than the public inquiry which must wait for the end of the police case -- and that it must be free to draft its own proposals.
The police also face tough questions over why an initial investigation into phone hacking was closed after Goodman was jailed in 2007. Detectives are also now looking into payments, in the tens of thousands of pounds, by journalists to police.
Coulson, suspected of conspiring to intercept communications and also of corruption, was bailed until October after nine hours at a south London police station.
Asked if he was being made a scapegoat for the hacking scandal, Coulson told reporters: "I'm afraid I can't say any more at this stage. There's a lot I'd like to say, but I can't."
His former colleague Goodman was re-arrested on Friday, police said, also to answer questions about alleged payments to police officers.
Cameron, trying to strike a balance between accepting his share of responsibility and sharing out blame to his opponents, said Labour, in power with the endorsement of some of the Murdoch press for 13 years, should not seek to make electoral capital out of the issue.
Several other journalists have been arrested in recent weeks as police pursue inquiries, much of them based on the files of the private investigator jailed with Goodman four years ago. Police say the files contain some 4,000 names.
The scandal took on devastating proportions for Murdoch this week with the leak of an allegation that a News of the World investigator had, in 2002 when Brooks was editor, not only listened in to cellphone voicemails left for missing 13-year-old Milly Dowler but deleted some to make room for more.
The schoolgirl was found murdered six months later, but her killer was only convicted last month, ensuring public memories of the notorious case were still vivid and raw.
($1 = 0.622 British Pounds)
Additional reporting by Keith Weir, Kate Holton, Mike Collett-White, Mohammed Abbas, and Stefano Ambrogi; Writing by Alastair Macdonald; Editing by Jon Boyle