Former News of the World editor Andy Coulson and one of his former top reporters were questioned about alleged corruption today after a dramatic double arrest by Scotland Yard.
Mr Coulson, the ex-Downing Street communications chief, was also questioned over phone hacking during his time at the paper.
Police sources later confirmed that former royal editor Clive Goodman - who was jailed in January 2007 over the scandal - had been rearrested in connection with alleged payments to police.
Mr Coulson, 43, and Mr Goodman, 53, were held for questioning at different police stations in south London.
The former editor had been expected to be arrested after an appointment at a station but Mr Goodman - who currently works for the Daily Star Sunday - was held after a dawn swoop by officers at his home in Surrey.
Detectives are searching both Mr Coulson's address in Forest Hill, south London, and Mr Goodman's property.
Officers investigating Operation Elveden - the inquiry into payments to police by the News of the World - and Operation Weeting, the long-running hacking investigation, are questioning the pair.
Referring to Goodman's arrest, a Scotland Yard statement said: "At 6.11am officers from the MPS' Operation Weeting together with officers from Operation Elveden arrested a man on suspicion of corruption allegations in contravention of Section 1 of the Prevention of Corruption Act 1906.
"The man, aged 53, was arrested at a residential address in Surrey. A search is ongoing at this address."
Meanwhile News International Chief Executive Rebekah Brooks addressed News of the World staff this afternoon, saying that she was staying on at News International "because she is a conductor for it all", former News of the World journalist Sophy Ridge claimed.
Ms Brooks said the decision to close the News of the World was taken because there could be another "two years plus" of trouble, Ms Ridge wrote on Twitter.
The Sky News political correspondent tweeted: "Rebekah Brooks said that advertisers said the brand was 'toxic', I'm hearing, and the decision 'was not done lightly'."
Ms Ridge also wrote that Ms Brooks said she was "trying to find them jobs where possible across News International and News Corp".
Ms Brooks "apologised to staff for 'operational issues' ie email access", Ms Ridge added.
And in a further development the Daily Star Sunday said detectives spent two hours at its offices in central London and took away a disc containing a record of all Mr Goodman's computer activity.
The paper stressed that there was "no suggestion whatsoever" that the journalist acted improperly during his occasional freelance shifts at the tabloid.
The Daily Star Sunday said in a statement: "Scotland Yard today sought the help of the Daily Star Sunday as they investigated allegations of police corruption involving the News of the World and its former royal editor Clive Goodman.
"They confirmed they were similarly carrying out these routine checks at all places where Mr Goodman has worked as a freelance since he left the News of the World.
"Officers formally requested any and all computer material that Goodman had been involved with during his occasional shifts as a freelance reporter at the paper over the last year to cross-check it with his activities in his News of the World role.
"They were particularly interested to check Mr Goodman's current email contacts to cross-match them with those from his time at the News of the World.
"There was no suggestion whatsoever that Mr Goodman had acted improperly during his occasional shifts at the Daily Star Sunday, and we can confirm that no payments of any kind were ever made by the newspaper to Clive Goodman contacts.
"After requesting the Daily Star Sunday's help, police were invited to visit the newspaper's offices where they were provided with a copy of all Mr Goodman's computer activity.
"The three officers were similarly invited to examine any desk where Mr Goodman may have sat during shifts. They left after approximately two hours with a disc of Mr Goodman's computer activity.
"For the record, the Daily Star Sunday has never carried, and has never been accused of carrying, any story that might have stemmed from phone hacking."
The moves by Scotland Yard pile further pressure on the Prime Minister, who gave Mr Coulson a job at No 10 despite his association with the scandal.
Mr Coulson had been widely expected to face police action today but few had predicted the decision to rearrest Mr Goodman, who was jailed in 2007.
It is the latest bombshell in a catastrophic week for News International chiefs, who announced they were shutting the Sunday tabloid because it had betrayed its readers' trust.
Mr Goodman was arrested in August 2006 along with private investigator Glenn Mulcaire over allegations that they hacked into the mobile phones of members of the royal household.
Five months later the royal reporter was jailed for four months and Mulcaire for six months after they admitted intercepting voicemail messages, including some left by Prince William, now the Duke of Cambridge.
The Old Bailey heard the pair tapped into more than 600 messages on the phones of royal family aides.
Mr Coulson responded by resigning as News of the World editor, saying he "deeply regretted" what happened and took "ultimate responsibility" for it.
Shockwaves from the hacking revelations and police payment allegations prompted David Cameron to promise today he would "get to the bottom" of the scandal.
Mr Coulson was arrested at 10.30am on suspicion of "conspiring to intercept communications" and "corruption allegations contrary to Section 1 of the Prevention of Corruption Act 1906".
As Mr Coulson was questioned by detectives, Mr Cameron revealed he had grown close to his former adviser and built up a friendship.
The Prime Minister said they discussed the hacking allegations while he was employed but he never had reason to doubt "the assurances he had given me and I accepted".
Of their contact since Mr Coulson's January resignation, he added: "I have spoken to him, I have seen him, not recently and not frequently, but when you work with someone for four years as I did, and you work closely, you do build a friendship and I became friends with him. He became a friend and is a friend."
Plain-clothed officers arrived at Mr Coulson's detached home in Forest Hill, south London, shortly before lunchtime carrying evidence bags.
One shouted "no comment" to reporters before informing them "nobody crosses this line" as he walked across the driveway.
Mr Coulson has been dogged by allegations of phone hacking on his watch for years, forcing him to give up his positions as News of the World editor and then as the Conservatives' top spin doctor.
Confirmation of the arrests prompted speculation that more executives from one of Britain's biggest newspaper publishers will face police action in the coming days.
Mr Cameron said he took responsibility for Mr Coulson's hiring by the Government but insisted he had commissioned a firm to carry out a background check beforehand.
Mr Coulson resigned from the No 10 post in January, saying the drip-drip of claims about illegal eavesdropping under his editorship was making his job impossible.
The Prime Minister said: "I made the decision, there had been a police investigation, someone had been sent to prison, this editor had resigned, he said he didn't know what was happening on his watch but he resigned when he found out, and I thought it was right to give that individual a second chance."
Mr Cameron said he and Mr Coulson spoke before Christmas about him leaving Downing Street.
"It wasn't in the light of any specific thing, it was a sense that the second chance wasn't working," he said.
The Prime Minister outlined sweeping changes to the way newspapers are regulated in the wake of the agenda-setting tabloid being sacrificed by James Murdoch, chairman of News International.
The decision was announced after advertisers deserted in droves over claims that murdered schoolgirl Milly Dowler, bereaved military families and relatives of 7/7 bombing victims were targeted by hackers working for the tabloid.
Amid widespread public anger, police chiefs revealed that 4,000 people might have fallen victim and that evidence indicated journalists had paid officers.
Labour leader Ed Miliband refuted claims by former Conservative deputy party chairman Lord Ashcroft that his own director of communications, Tom Baldwin, had used private investigators while he was a journalist at The Times.
Mr Miliband told BBC Radio 4's World at One programme: "Michael Ashcroft, the large Conservative party donor, has been putting it around that somehow Tom Baldwin hired a private investigator illegally to look into him.
"Tom Baldwin absolutely denies that."
Mr Miliband claimed David Cameron's aides had been handed a wealth of information warning them about practices Mr Coulson had been involved in while editor of the News of the World.
He added: "If he (the Prime Minister) wants to really lead change in the Press in this country he's got to come clean and he has got to apologise for hiring somebody who had resigned as editor of the News of the World over phone hacking."
He added: "As leader of the Labour party I take responsibility for the fact that we should have been more outspoken about phone hacking earlier on, we should have been more willing to speak out without fear or favour about some of the actions of News International."
Keith Vaz, chairman of the Home Affairs select committee, told World at One he would be writing to the Prime Minister today with recommendations about what the inquiries should look at.
He said the remit should be "as wide as possible" and hone in on where witnesses to the committee's previous investigations into the issue had been "less than open and transparent".
Andy Coulson was released from police custody earlier this evening.
The ex-Tory spin doctor left Lewisham police station in south east London amid a media scrum saying: "There is an awful lot I would like to say, but I can't at this time."
He was released on police bail until October. Former News of the World royal editor Clive Goodman was also also released and bailed until October.