LONDON (Reuters) - Rupert Murdoch's powerful UK news arm reversed course and admitted its role in a long-running phone hacking scandal that had thrown into question the Prime Minister's judgment and threatened Murdoch's biggest ever deal.
News International, parent company of Britain's top-selling News of the World tabloid, had always vigorously denied it knew journalists were hacking the phones of members of the royal family, politicians, celebrities and sports stars, and blamed a handful of "rogue reporters" for the scandal.
But in a major turnaround for the company, part of Murdoch's global media empire News Corp, News International said on Friday it would admit liability and pay compensation in eight cases -- although many more believe they were targeted.
Those who will receive an "unreserved apology" from the group include actress Sienna Miller and politician Tessa Jowell.
The scandal threw into question the judgment of Prime Minister David Cameron, who appointed former News of the World editor Andy Coulson as his head of communications.
Coulson ran the paper at the time of the hacking scandal. Although he has always denied knowledge of it, he was forced to resign as Cameron's media manager earlier this year, saying the focus on the hacking scandal was too great a distraction.
Analysts said the move was an attempt to draw a line under the case and limit potential financial costs as News Corp tries to push ahead with its planned $14 billion purchase of BSkyB, a deal that has angered other British news operators who fear the group's growing influence over Britain's media.
"Following an extensive internal investigation and disclosures through civil legal cases, News International has decided to approach some civil litigants with an unreserved apology and an admission of liability," it said in a statement.
"We have also asked our lawyers to establish a compensation scheme with a view to dealing with justifiable claims fairly and efficiently .... We will, however, continue to contest cases that we believe are without merit or where we are not responsible."
Lawyer Mark Lewis of Taylor Hampton Solicitors, who represents four individuals currently suing the News of the World including horse jockey Kieren Fallon, said he had yet to receive any settlement offers but welcomed the development.
"This is a good stab in the right direction but it is a long way from being over," he told Reuters. "There are people who don't even know at this stage that they are victims."
Some media reports suggested the settlement could reach 20 million pounds.
"This is being driven by business considerations because clearly the reputational damage is just mounting," media consultant Steve Hewlett told Reuters. "The price that they will pay for admitting liability is way lower than the consequences of fighting on all fronts."
A spokesman for Britain's Department of Media said the admission would not affect News Corp's planned takeover of pay-TV operator BSkyB, which is set to be given the green light by Culture Secretary Jeremy Hunt in the next few weeks.
"The two issues aren't connected," the spokesman said. "The issue with BSkyB is simply about media plurality. If something happens to affect that, then he can take that into account."
But former Home Secretary John Prescott, who believes his phone was hacked by the paper, said the deal should not proceed.
"The NOTW (News of the World) has now admitted mass criminality. The Gvt should NOT approve Murdoch's bid for BSkyB until all investigations are complete," he wrote on short message service Twitter.
Earlier this week, two reporters were arrested as part of the investigation into the scandal. The men, including former senior News of the World editor Ian Edmondson, were held on suspicion of conspiring to intercept communications and unlawful interception of voicemail messages.
Edmondson was sacked at the start of this year after an internal inquiry into his conduct. The other man was identified as Neville Thurlbeck, currently the paper's chief reporter.
The scandal dates back to 2005/6, when the News of the World's royal reporter and a private detective were arrested and jailed for snooping on the voicemail messages of royal aides.
A new police inquiry was launched last January after being severely criticized by politicians and celebrities who suspected they too had had their voicemail intercepted.
Critics argued the original police probe had not gone far enough, and some have suggested detectives were too close to the News of the World. Police have denied this.
Additional reporting by Paul Sandle, Olesya Dmitracova, Kate Holton, Tim Castle and Georgina Prodhan; Editing by Georgina Prodhan/Ruth Pitchford