In another damaging day for Mr Murdoch in the deepening phone-hacking scandal, the communications regulator Ofcom revealed that it was "closely monitoring" allegations of widespread criminality at News International and said it had a duty to be satisfied that Mr Murdoch and his top executives were "fit and proper persons" to control BSkyB.
Amid continuing claims that the News of the World had accessed the voicemails of child murder victims, Mr Murdoch's embattled top-selling British title last night faced grave new claims that relatives of soldiers killed in Iraq and Afghanistan may have been victims of voicemail eavesdropping.
A firm of solicitors representing the families of men killed in several high-profile cases in Iraq said they were contacted by Scotland Yard yesterday to say evidence had been found that they may have been targeted by the NOTW's private investigator, Glenn Mulcaire.
In a statement, MPH Solicitors said: "We have been contacted this morning in connection with a possible phone-hacking on our clients... arising out of high profile military inquests in 2006/2007."
In a sign of the rapidly-developing nature of the crisis engulfing News International, the Ministry of Defence said last night it was seeking clarification from the Yard of the names of those whose details were found on Mulcaire's records.
Among the families that could be affected are those of Sergeant Steven Roberts, whose lack of body armour contributed to his death, Lance Corporal Matty Hull who was killed by friendly fire, and the personel who died in the crash of a US Sea Knight aircraft in Kuwait.
Geraldine McCool, the MPH solicitor who represented who represented the relatives of both men, and whose phone may also have been accessed, said she was not aware of any articles which had given rise to suspicion of hacking but called for the full extent the alleged "diabolical practice" to be made clear.
News International reacted to the fresh allegations last night by saying its support for the armed services was "impeccable" and it would be "absolutely appalled and horrified" if the claims were true.
The Yard declined to comment on its ongoing investigation but in a day of rapidly-changing developments, it became clear its inquiry into the phone hacking scandal has rapidly accelerated. It is expected that as many as five NOTW journalists and executives, on top of the three previously detained, are expected to be arrested in the coming days.
In an emergency debate in the House of Commons, the former Labour minister Tom Watson accused James Murdoch, the chairman's son and heir, of perverting the course of justice by engaging in a cover-up and called for him to be suspended from the News Corp board.
Hours after the Labour MP Chris Bryant accused the News of the World of hacking phones linked to the murdered Essex schoolgirl Danielle Jones, the 80-year-old proprietor gave his personal backing to the paper's former editor and News International's current chief executive, Rebekah Brooks.
In a statement, Mr Murdoch called claims of hacking and payments to police officers "deplorable and unacceptable". He said the company "must fully and proactively co-operate with the police in all investigations and that is exactly what News International has been doing and will continue to do under Rebekah Brooks' leadership".
As fallout from the dispute over the NOTW's hacking of the phone of the murdered schoolgirl Milly Dowler crossed the Atlantic, Mr Murdoch's News Corp shares tanked in New York, falling by nearly 5 per cent at one stage, wiping £180m from the tycoon's stake. By close of trading, he had lost £120m in the day.
MPs demanded the Coalition Government pause its approval for News Corp's bid for full control of BSkyB.
Mr Watson told the Commons: "James Murdoch and Rebekah Brooks now have to accept their culpability and they will have to face the full force of the law... They are not fit and proper persons to control any part of the media in this country."
Although Jeremy Hunt, the Culture Secretary, is likely to shrug off the demands and give final approval to the deal tomorrow, the takeover may not go ahead. The BBC's business editor, Robert Peston said BSkyB's independent directors would probably demand a higher price because of the risk of Ofcom intervening.
On his BBC blog, Peston wrote: "Rupert Murdoch and News Corporation will almost certainly have to delay their takeover of BSkyB – at least until it is apparent that the News of the World and News International have been cleaned up."
While News Corp's reported comments may have been intended to take the sting out of the Government's approval of the deal, they may also have been an attempt to take some of the pressure off Ms Brooks. Amid public outrage, 15 high-profile companies – including Lloyds, Virgin, Vauxhall and the Co-op – pulled their advertising from this Sunday's NOTW. The Co-op said the allegations the company had hacked the phones of crime victims had been "met with revulsion" by its members.
David Cameron, a close friend of Ms Brooks, suggested the Government would hold a public inquiry into the scandal. He said: "We do need to have an inquiry, possibly inquiries, into what has happened." Under pressure from Ed Miliband, the Prime Minister said inquiries must be "public, independent, and have public confidence".
Police are investigating new evidence that, under the editorship of Andy Coulson, Mr Cameron's former communications director, the NOTW bribed police officers for information.
MPs voice their anger
'Let us be clear. There will be an inquiry, perhaps inquiries, into events. It is no longer just celebrities and politicians, but murder victims. The whole country is appalled.'
David Cameron
'Editorial negligence is tantamount to complicity. If Brooks has a single shred of decency, she would resign ... My hope is that people who have committed criminality at the NOTW end up going to prison.'
Chris Bryant
'People are rightly angry. Why were these allegations not investigated sufficiently at an earlier stage?'
Yvette Cooper
'News International has entered the criminal underworld... James Murdoch should be suspended from office while the police now investigate what I believe was his personal authorisation to plan a cover-up of this scandal.'
Tom Watson
'Were News International, with their record of wrongdoing they have admitted so far, to apply to run a minicab firm they would not receive a licence.'
Frank Dobson
'The biggest press scandal in modern times, getting worse by the day ... This was not the actions of some rogue reporter: Rebekah Brooks should take responsibility and resign.'
Ed Miliband
