David Cameron refused to accept the resignation of his communications chief, Andy Coulson, over the News of the World phone-hacking scandal, it was reported last night.
Tensions inside Number 10 have mounted over the potential damage caused to the government's reputation by allegations of voice-mail hacking and mobile phone interception at the Sunday red-top when Mr Coulson was its editor. After a series of rows with Downing Street policy chief Steve Hilton, Mr Coulson offered to quit, according to The Mail on Sunday.
However, both Mr Cameron and George Osborne, the Chancellor, are said to have refused to accept the resignation and vowed to stand by Mr Coulson, who has played a key role in overseeing the coalition's media strategy.
"Andy has said sorry to the PM for the embarrassment caused by the phone-bugging saga," a source, described as a "well placed insider", told The MoS. "He said it was making it difficult to do his job properly but he was doing his best."
It is not clear when the offer to quit No 10 was made. In September, the Prime Minister's official spokesman was asked if Mr Coulson had offered to resign. He said "that allegations had been made and Andy Coulson had denied those allegations so the issue did not arise".
Mr Coulson left Rupert Murdoch's newspaper after its royal editor, Clive Goodman, and a private investigator, Glen Mulcaire, were jailed in 2007 after being convicted at the Old Bailey of hacking the phones of Prince William's aides.
Former employees have claimed Mr Coulson knew that staff had intercepted phone messages, something denied by him and the paper's parent company, News International, which maintains the practice was the work of Goodman and Mulcaire.
However, claims that wrongdoing was widespread during Mr Coulson's tenure as NoW editor dogged his time as Tory spin doctor when the party was in opposition and followed him into No 10.
Ian Edmondson, an executive at the newspaper, has been suspended as a result of claims made by actress Sienna Miller who is suing the NoW's parent company and Mulcaire, accusing them of breaching her privacy and of harassment.
Prosecutors announced last week that Alison Levitt QC will trawl through all the material collected by Scotland Yard linked to the phone- hacking scandal plus any newly gathered information in a move it has been suggested could spark fresh prosecutions.
The Director of Public Prosecutions, Keir Starmer, said the "comprehensive assessment" of evidence would determine whether further criminal charges could be brought.
Paul Gascoigne is the latest celebrity to sue the NoW, alleging that he was a victim of phone-hacking. The former England footballer's solicitor, Gerald Shamash, confirmed last night that proceedings would be issued within days. "All being well, we will probably issue this week," he told The Observer. The pressure of the case had added to Mr Gascoigne's vulnerable mental state, he said. "It has made things even more difficult for his general wellbeing."
Mr Gascoigne joins a growing line of sport stars, actors, politicians and TV personalities who claim to have fallen victim to phone hackers employed by the paper.
An NoW spokeswoman said: "We will, of course, co-operate fully with any inquiries relating to the assessment by the CPS."
Late last night a Downing Street spokesman denied the Mail reports.