Britain was looking for a way out of approving media baron Rupert Murdoch's multi-billion dollar deal to buy broadcaster BSkyB amid a phone-hacking scandal that has damaged the prime minister and raised broader questions about politicians' relations with the media.
Prime Minister David Cameron said legal processes had to be followed, but fired a warning shot at Murdoch, saying his company needed to focus on clearing up this mess before thinking about the next corporate move.
His deputy Nick Clegg, from junior coalition partners the Liberal Democrats, earlier urged Murdoch to reconsider the bid after revelations one of his newspapers hacked into the phones of murder victims and relatives of Britain's war dead.
New allegations on Monday included reports it had bought contact details for the British royal family from a policeman and tried to buy private phone records of victims of the September 11, 2001, attacks on the United States. Police declined comment.
Do the decent thing, and reconsider, think again about your bid for BSkyB, Clegg told BBC News, addressing Murdoch, after meeting relatives of one of the victims of phone-hacking, a murdered schoolgirl, who said police had kept them in the dark for years.
A spokesman for Cameron, who faces a parliamentary vote on the scandal this week in which Clegg's party could desert him, said Clegg was entitled to his views.
Piling the pressure on Murdoch, who flew to London on Sunday to limit damage to his media empire, U.S. News Corp shareholders suing over the purchase of a business run by Murdoch's daughter filed a revised complaint, saying the British phone hacking scandal reflected how the company's board fails to do its job.
Earlier the British government asked media regulator Ofcom and the consumer watchdog to reassess the bid in the light of the scandal, a move that could provide a basis to block the buyout.
The new request to Ofcom, which is already assessing whether News Corp is a 'fit and proper' holder of a broadcast license, and the Office of Fair Trading follows a report in the Independent newspaper that government lawyers were drawing up plans to block the BSkyB bid.
Shares in BSkyB dropped more than 7 percent on Monday morning after a similar fall on Friday. News Corp shares fell more than 7 percent in New York last week.
We believe the deal is all but dead, Panmure Gordon analyst Alex DeGroote said.
The head of UK equities at one top 30 investor in BSkyB told Reuters they expected the deal to be delayed. I believe the takeover will happen in due course but it is unlikely to go through until next year at the earliest, the investor said.
Murdoch's News Corp wields influence from Hollywood to Hong Kong and includes U.S. cable network Fox and the Wall Street Journal as well as Britain's biggest selling paper, the Sun.
He has shown no sign of backing away from the BSkyB deal, which would be his company's largest acquisition but News Corp said later on Monday it had paved the way for the bid to undergo a full inquiry by the Competition Commission by withdrawing undertakings that could have fast-tracked the deal.
Eight people, almost all journalists, have been arrested so far in a police inquiry into the allegations, which include that a company executive may have destroyed evidence. News Corp's British media arm firmly denies any obstruction of justice.
You wouldn't be human if you weren't totally appalled by the revelations that have come to light, they're just stomach churning and I think everyone feels totally shaken, Culture Secretary Jeremy Hunt said in a television interview.
Hunt's strong comments, and the approach to the regulators, may have been designed to give the government some political cover ahead of Wednesday's debate, lawyers said, as from a legal standpoint the takeover deal and hacking scandal are not linked.
Both Hunt and Cameron, from the center-right Conservatives who lead the coalition government, have been accused by left-leaning Labour of being too close to Murdoch and too slow to act to uncover the full extent of the scandal.
Andy Coulson, a former editor of the News of the World, was until earlier this year Cameron's spokesman, before he was forced to resign over the scandal.
Labour party leader Ed Miliband said on Sunday he would force parliament to vote this week if Cameron did not take steps to halt News Corp's $14-billion bid for the 61 percent of BSkyB that it does not already own.
He said on Monday the government had moved reluctantly. They are doing it not because they want to, but because they have been forced to, Miliband said, urging Murdoch to drop the bid for BSkyB.
A vote in parliament could split the coalition between Cameron's Conservatives and the Liberal Democrats who, traditionally less favored by Murdoch's media, have signaled they could vote with Labour on the issue.
It would also give Labour a chance to cast itself as the champion of a public angered by allegations that News of the World reporters and editors were complicit in breaking into voicemails including those of bombing victims for stories.
We are working on a plan to suspend the deal while the police investigation is taking place, the Independent quoted a senior government source as saying. A spokesman for the prime minister declined to comment.
Hunt's letter to the regulator asked them to consider whether News Corp's undertakings which were made to secure the deal were still credible given the revelations.
Given the well-publicized matters involving the News of the World in the past week...I would be grateful if you could let me know whether you consider that any new information that has come to light causes you to reconsider any part of your previous advice to me including your confidence in the credibility, sustainability of practicalities of the undertakings offered by News Corporation, the letter said.
Murdoch's own Sunday Times reported that a 2007 internal investigation at the News of the World had found evidence that phone hacking was more widespread than the company had admitted and that staff had illegally paid police for information.
As Murdoch, 80, was driven into his London headquarters on Sunday, he held up the final edition of the News of the World, the 168-year-old newspaper he bought in 1969 then closed last week in a bid to stem the crisis.
Christina Camargo-Lima, walking on her way to work past Murdoch's London flat on Monday morning, welcomed the criticism of Murdoch. I think it's time the mogul came down. They just can't control democracy like that.
The News of the World is best known for its lurid headlines exposing misadventures of the rich, royal and famous. Its last headline said simply Thank You & Goodbye over a montage of some of its most celebrated splashes of the past 168 years.
On Monday, the BBC said News International had bought phone details for the royal family from a security officer, citing company emails. The implication, therefore, is that the security of the head of state was in some sense being threatened, said BBC business editor Robert Peston.
The Daily Mirror newspaper reported, citing an unidentified source, that News of the World journalists had offered to pay a New York police officer to retrieve the private phone records of victims of the September 11, 2001, attacks.
There was no immediate comment from the company.
Murdoch dined on Sunday in an upmarket hotel with his British newspaper arm's chief executive Rebekah Brooks, a friend of Cameron's and editor of the News of the World at the time of the alleged phone-hacking, and his son and heir apparent, James. Cameron has since said Brooks should step down.
The affair has thrown a harsh spotlight on the long-standing ties between British politicians and Australian-born Murdoch.
Cameron has insisted that the government has no legal power to block the BSkyB deal if it is satisfied that enough media plurality -- competition -- will be maintained. It had already indicated it would accept News Corp's assurances on this count.
FIT AND PROPER
The Independent said the government had latterly hoped the broadcasting regulator Ofcom would stop the deal going through on grounds that News Corp directors were not fit and proper to run BSkyB, but this was unlikely to happen until a possibly lengthy police investigation had been completed.
Instead, it said lawyers in the department of Culture and media were now looking at using competition criteria to block the deal.
That would still be embarrassing for the prime minister, who has ordered a public inquiry and also admitted media barons had too much influence over politicians, but arguably less damaging than a split with his coalition partners.
Blocking the BSkyB deal on grounds of media plurality would also be better for Murdoch than if he and his team were found to be not fit and proper to run the broadcaster, as that could see him lose his existing 39 percent of the company.
(Additional reporting by Paul Sandle, Keith Weir, Tim Castle, Sudip Kar-Gupta, Sinead Cruise, Chris Vellacott and Michael Holden; writing by Philippa Fletcher; editing by Ralph Boulton)