Did Cameron's dinner with Murdoch break ministers' code?

David Cameron was challenged last night to explain why he held a secret dinner with James Murdoch as the Government prepared to take a crucial decision on the Murdoch media empire.

The Labour Opposition questioned whether Mr Cameron had broken the ministerial code of conduct by meeting the chairman of News Corporation in Europe and Asia only a few days after stripping Vince Cable, the Liberal Democrat Business Secretary, of the power to decide whether News Corp should be allowed to buy the 61 per cent of BSkyB it does not already own.

The move came as the Government faced all-party pressure over its links with Rupert Murdoch despite last week's resignation of Andy Coulson, the Downing Street director of communications, over the continuing controversy about telephone hacking at Mr Murdoch's News of the World, which cost Mr Coulson his job as the paper's editor in 2007.

Simon Hughes, the Liberal Democrats' deputy leader, is expected to pursue legal action against News International over his phone being hacked rather than accept an out-of-court settlement. He is due to meet his lawyers to make a final decision shortly. He told the Commons last September that while he defended freedom of the press, "this [phone hacking] is abuse and illegality. It has to end, and we must be robust about it."

Friends of Mr Hughes said he had little interest in an out-of-court settlement and was likely to press ahead with court action. They said the MP dealt with many highly sensitive constituency cases and was appalled by the prospect that information concerning them could have been compromised.

Today the all-party Commons Home Affairs Select Committee may decide to hold a new round of public hearings into allegations that phone tapping was rife. Amid protests that Scotland Yard failed properly to investigate allegations about the News of the World, it is also considering whether the police take hacking seriously enough. If the committee decides to hold hearings, it would be likely to summon members of the paper's former staff, including Mr Coulson, to give evidence.

The Independent revealed yesterday that Mr Cameron met James Murdoch at the Oxfordshire home of Rebekah Brooks, the chief executive of News International. The private dinner she hosted took place shortly before Christmas.

In a letter to the Prime Minister last night, Ivan Lewis, the shadow Culture Secretary, asked him five questions, including: "Can you clarify whether you discussed News Corp's bid for BSkyB with Mr [James] Murdoch?"

Mr Lewis said: "David Cameron's decision to attend this dinner with James Murdoch and Rebekah Brooks in the middle of a quasi-judicial process raises serious questions about his judgment. The integrity of our media is central to our democracy. That is why his answers are of significant public interest."

Tory sources dismissed Labour's challenge, insisting that the social event would not be covered by the ministerial code. They said the BSkyB takeover would not have been discussed and that the meeting was not improper in any way because all prime ministers met newspaper proprietors.

Mr Cameron and Rupert Murdoch are both due to attend the Davos World Economic Forum this weekend. Downing Street refused to be drawn on whether their paths would cross, although Tory sources said no meeting between the two men was scheduled.

Newscorp's bid for Sky

James Murdoch, the European chairman of News Corporation, is desperate to avoid a Competition Commission inquiry into his company's bid for the 61 per cent of Sky it does not already own. He fears any delay to the deal could see NewsCorp end up having to pay much more than the £7.5bn it has offered.

However, Ofcom, the media regulator, has already said it thinks the Commission should investigate. The decision now rests solely in the hands of Jeremy Hunt, the Culture Secretary, given the role by David Cameron when the Business Secretary, Vince Cable, was caught making partial remarks about the Murdochs.

Mr Hunt says he is acting independently and that he will make his decision purely on legal grounds. He has the power to refer the deal to the Commission if he accepts Ofcom's view that a NewsCorp takeover of Sky might damage the plurality of Britain's media, a more subjective test than the competition hurdles the deal has already cleared with European Union regulators.

If he does not do so, or comes to an arrangement with NewsCorp that sees it make concessions in return for avoiding an inquiry, there will be a storm of protest about the neutrality of Conservative ministers – and almost certainly a legal challenge.