George Osborne is "happy to be called" to the Leveson inquiry over his links to the Murdoch empire, it emerged last night, after his most senior aide was reported to the Cabinet Secretary over an alleged Budget leak to a News Corp lobbyist.
Sources close to the inquiry said that it would be "madness" not to consider the Chancellor as a key witness, given that he was at the heart of the relationship between the Conservative Party and Rupert Murdoch's company. Such words signal a dramatic change of heart from the inquiry because it had been indicated previously that Mr Osborne would be required to give only written evidence.
An aide to Mr Osborne said last night: "He is happy to be called, but it is a matter for the inquiry."
As Leveson enters what may be its most dramatic week, there were reports in Whitehall that Jeremy Hunt, the Culture Secretary, is planning to resign after giving evidence on Thursday. A spokesman for Mr Hunt denied that he was ready to quit, but a Whitehall source said the minister had told aides he was prepared to resign after his appearance.
Mr Hunt is expected to explain why he told the Commons last month that he had had limited contact with Mr Michel before and during his quasi-judicial oversight of News Corp's bid to take over BSkyB, despite a stream of emails and texts he exchanged with Mr Michel, often signed off "Daddy".
The Culture Secretary must also explain why, by writing a memo to David Cameron in November 2010 backing the proposal, he ignored the advice of his departmental lawyers not to intervene in support of the BSkyB bid. Mr Hunt is accused of misleading Parliament after telling the House on 25 April that he had made no interventions in support of the bid.
A spokesman for Mr Hunt said last night: "Jeremy is not resigning. Not this weekend, not next weekend. Absolutely not."
But as Mr Hunt continued to fight for his career, the role of the Chancellor and Prime Minister in courting the Murdochs remained in the spotlight. Last night, Rupert Harrison, Mr Osborne's chief of staff, was reported to Sir Jeremy Heywood, the Cabinet Secretary, for allegedly briefing market-sensitive information from the coalition's first Budget of June 2010.
In an email to Fred Michel, News Corp's head of public affairs in Europe, four days before the Budget, and published last Friday, Mr Harrison wrote: "Obviously, I can't really comment on Budget policy decisions now, but I would just point out we have said nothing over the last few weeks or months that would suggest any extension of VAT".
The Labour MP Tom Watson wrote to Sir Jeremy saying that any "reasonable person" would understand that Mr Harrison was ruling out VAT on newspapers. He said the information was "clearly market sensitive and of direct interest to News Corporation". Mr Watson asked Sir Jeremy to investigate whether the contents of the email breached the code of conduct for special advisers and the Cabinet Office's guidance on government communications.
Mr Watson told The Independent on Sunday last night: "There could be no news angle to telling News International's lobbyist about the Budget before Parliament and the markets. These secret emails reveal the links of the shadow state. There should be an investigation for breaches of the ministerial code and the code of conduct for special advisers."
In another damaging development for No 10, one of Mr Cameron's top aides was accused of breaching Civil Service guidelines by inviting Mr Michel into a ministerial policy-making meeting. Emails released to Leveson show that on 2 December 2010, Rohan Silva, who at the time was deputy to Mr Cameron's strategist Steve Hilton, suggested that Mr Michel could attend a meeting at the Department for Energy and Climate Change to discuss carbon emissions. News Corp's chief executive, James Murdoch, has taken a keen interest in environmental issues. In the end, Mr Michel did not attend after civil servants at the department blocked the request. But on another occasion, on 17 March 2011, Mr Michel emailed Mr Silva to ask if he could be invited to a No 10 event on entrepreneurship hosted by Mr Hilton the following Monday. Mr Silva replied "Sweet, dude" and asked his diary secretary if she could "do the business and make sure Fred gets what he needs".
A No 10 spokesman denied that Mr Silva had been acting in breach of the codes of conduct for civil servants and special advisers, insisting that both meetings had been attended by a number of companies.
But the apparent friendly relationship that Mr Michel shared with another No 10 figure, following the disclosure of text messages he exchanged with Gabby Bertin, Mr Cameron's press secretary, and Craig Oliver, his director of communications, will fuel fears that Downing Street was, in effect, on the same side as News Corp.
Mr Watson added: "It would be laughable if it wasn't so serious. Political advisers were inviting Murdoch lobbyists into ministerial policy-making meetings. It shows a remarkable closeness that I've never seen in 25 years in politics. What other lobbyists were invited into the heart of Cameron's government?"
Mr Harrison and Mr Michel also exchanged several cordial texts and emails. On 3 March 2011, after Mr Hunt had given the green light to a revised News Corp bid for BSkyB, subject to competition concerns, Mr Harrison texted Mr Michel to say: "Looks like you've found a good solution."
After the news that the News of the World was to close, Mr Harrison texted Mr Michel a message of support: "Hope you're holding up."
A Treasury official insisted that Mr Harrison had done nothing wrong.
Vince Cable, the Business Secretary, who gives evidence on Wednesday, has cryptically suggested that not everyone who has given evidence to Leveson has given a true version of events. He told The Independent on Sunday: "I'm giving evidence very soon, within the next few days. I think so much is now stacking up and people giving different versions of events, I would prefer to give that in that inquiry context, rather than just fire off a few one-liners at this stage."
Harriet Harman, Labour's culture spokesperson, is likely to raise questions this week about the scale of the pay-off awarded to Adam Smith, who resigned last month as Mr Hunt's special adviser.
Labour's leader, Ed Miliband, said the latest evidence raised "huge questions" about David Cameron's judgement, as well as Mr Hunt's role. "From what I have seen, I think we have got yet more evidence that Jeremy Hunt wasn't the right person to be taking the decision about the BSkyB bid.
"He wrote a memo to the Prime Minister for the bid four weeks or so before taking charge of it, and I think it really calls into question David Cameron's judgement about why he appointed him in the first place to take over this bid.
"Here is somebody who was an advocate within government for the bid, so there are huge questions for David Cameron to answer.
"And there are yet more questions for Jeremy Hunt to answer. I mean, why did he tell the House of Commons that he wasn't intervening in this issue when he wasn't responsible for it when, in fact, he was?
The man Fred Michel knew as "Daddy" will have to explain why he apparently misled Parliament and overrode the advice of his legal team to back the Murdoch BSkyB bid at Leveson this Thursday.
In an email to Adam Smith on 28 June 2011, Hunt said it "feels like the world doesn't trust the Murdochs further than they can be thrown!" A week later, the empire was hit by the Milly Dowler phone-hacking scandal.
Hunt told the Commons on 25 April that he had made "no interventions" on behalf of the Murdoch bid when Vince Cable had quasi-judicial oversight, yet his memo to the PM, revealed last week, contradicts this. Hunt also told Parliament that he had minimal contact with Fred Michel. Yet the 67 texts between the two, in which they call each other "Daddy", "Papa" and "Mon ami", undermine this.
Fred Michel is clearly an effective lobbyist, as an email exchange with Rohan Silva, a No 10 official, shows. The day before a UK-India trade summit attended by the head of Star India, a News Corp company, in Manchester on 10 March 2011, (when the Government was still considering the BSkyB bid), Michel emailed that it would be a "massive diplomatic embarrassment" if no one from the Government attended. Silva replied: "We're on the case." The next day, Michel emailed Silva: "There was a nice video from DC. Summit went well." Silva responded: "Cheers for alerting us to the issue."
The exchange suggests that Cameron recorded the video at the last minute as a favour for Murdoch. The mystery deepened yesterday when No 10 said the PM's diary showed he recorded the message the day before Michel sent his request.
He may be regretting that he once insisted that he was happy to fit in the school run around his cabinet duties. Fred Michel boasted that he was able to speak to the Deputy PM because their children attended the same Putney school.
Michel told Lena Pietsch, Clegg's press secretary, on 16 March 2011, while the BSkyB bid was still under consideration by Jeremy Hunt: "Told [Nick] this morning we need to be resilient and keep hammering on AV [the Alternative Vote]. Xx."
A Clegg aide said the two met "occasionally" at the school gate, but insisted there had been no inappropriate contact. Yet there are questions that Mr Clegg will have to explain at Leveson, such as why did he allow his aides, Pietsch and Tim Colbourne, to meet Michel at No 10 when Vince Cable had quasi-judicial oversight of the BSkyB bid?
10 November 2010 Jeremy Hunt cancels a meeting with James Murdoch as it may compromise his judicial position in the News Corp bid for BSkyB.
16 November Fred Michel thanks Hunt for speaking to Murdoch on the phone.
19 November Hunt sends a memo to the Prime Minister indicating support BSkyB bid, saying the country would "suffer for years" if the deal failed.
21 December Business Secretary Vince Cable "declares war" on Murdoch. His media policy role is handed to Hunt.
24 December Hunt texts Michel: "Hope Daddy has a lovely Xmas! Jeremy". Michel replies: "You too mon ami! Fred".
31 December Ofcom tells Hunt there is a plurality issue with the takeover bid.
6 January 2011 Hunt meets Murdoch. 10 & 11 January Email suggests Hunt has advised Michel to highlight legal errors in the Ofcom report.
20 January Murdoch meets Hunt at his department, exchanges friendly text messages and agrees loosely to meet.
25 January Hunt's special adviser Adam Smith reassures Michel that there is "potential to mitigate problems".
1 February Hunt confers "quasi-judicial role" on himself in the takeover bid.
9-10 February Ofcom demands better safeguards from News Corp. News Corp confirms its offer to spin off Sky News.
17 February Email between Smith, Michel and Murdoch indicates that Hunt advised News Corp to "be strong and confident when we go public".
24 February Smith tells Michel that that he and Hunt are in no position to interfere with the process.
3 March Hunt says he will not refer the bid to the Competition Commission.
23 March Michel emails James Murdoch to say that he has run Hunt through News Corps key arguments.
17 April Smith emails Michel, seemingly to pass on Hunt's advice on dealing with the OFT.
19 April Smith texts Michel to say Hunt is trying to speed up the process. Hunt announces a delay after consultation receives 40,000 responses.
20 April Smith texts Michel that they hope to complete bid by 24 June: "But we can't tell journalists that can we?"
1 July Hunt announces he is ready to approve the takeover by 18 July.
4 July The Guardian reports that murdered schoolgirl Milly Dowler's phone was hacked.
6 July Ofcom raises concerns.
7 July Smith emails Michel to say there will be no more objections: "not official, we're not putting a timetable on it, we're just saying we'll consider the responses to the consultation and make a decision when we've done so." Michel asks that they "both keep the same briefing line for the consultation".
10 July News of The World publishes final issue.
11 July David Cameron texts Rebekah Brooks to tell her to keep her head up.
12 July Rebekah Brooks resigns as chief executive of News International.
15 July News Corp withdraws BSkyB takeover bid.