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Rupert Murdoch and the British government agreed on Monday to refer his bid for broadcaster BSkyB to regulators, opening a lengthy review in the hope of taking the sting from a phone-hacking scandal threatening the buyout and sending tremors through the political establishment.
British newspapers published allegations of more widespread hacking and theft of data from figures including former prime minister and finance minister Gordon Brown.
News Corp withdrew an offer to spin off BSkyB's Sky News, which it had made to get the deal approved. The government responded by referring the matter to the Competition Commission.
The move is News Corp's second bold gamble in the space of five days to regain the initiative from politicians opposed to the deal, who had linked the multi-billion-dollar BSkyB bid to a phone-hacking scandal at the News of the World tabloid.
Murdoch took a shock decision last Thursday to shut down the tabloid, which was revealed a week ago to have hacked into the voicemails of murder victims and bereaved relatives as well as celebrities and politicians.
"It's a smart tactical move," said Ian Whittaker, media analyst at Liberum Capital, noting that it also freed the government from a politically unacceptable but apparently unavoidable decision to approve the deal in the current climate.
"It gets the government off the hook. But there's still a very strong chance that in the end it will not go through in the short term or medium term. There are enough players out there that are opposed," he told Reuters.
New revelations on Monday included allegations that a second of Murdoch's British newspapers had been involved in stealing personal data, this time from former Prime Minister Gordon Brown when he was finance minister for left-leaning Labour.
Prime Minister David Cameron from the centre-right Conservatives said legal processes had to be followed as his coalition, which had been expected to give its final backing to the bid last week, set in train a lengthy judicial procedure.
But he fired a warning shot at Murdoch, saying his company, which had itself cleared the way for the legal procedure in a damage-limitation move, needed to focus on "clearing up this mess" before thinking about the next corporate move.
His deputy Nick Clegg, from junior coalition partners the Liberal Democrats, earlier urged Murdoch to reconsider the bid after revelations one of his newspapers hacked into the phones of murder victims and relatives of Britain's war dead.
Other reports which emerged on Monday included allegations Murdoch's News of the World had bought contact details for the British royal family from a policeman and tried to buy private phone records of victims of the Sept. 11, 2001, attacks on the United States. Police declined comment.
"Do the decent thing, and reconsider, think again about your bid for BSkyB," Clegg told BBC News, addressing Murdoch, after meeting relatives of one of the victims of phone-hacking, a murdered schoolgirl, who said police had kept them in the dark about it for years.
A spokesman for Cameron, who faces a parliamentary vote on the scandal this week in which Clegg's party could desert him, said Clegg was entitled to his views.
Piling the pressure on Murdoch, who flew to London on Sunday to limit damage to his media empire, U.S. News Corp shareholders suing over the purchase of a business run by Murdoch's daughter filed a revised complaint, saying the British phone hacking scandal reflected how the company's board fails to do its job.
Shares in BSkyB dropped more than 4 percent on Monday. News Corp shares also fell more than 7 percent in New York after a similar drop on Friday.
Murdoch's News Corp wields influence from Hollywood to Hong Kong and includes U.S. cable network Fox and the Wall Street Journal as well as Britain's biggest selling paper, the Sun.
Eight people, almost all journalists, have been arrested so far in a police inquiry into the allegations, which include that a company executive may have destroyed evidence. News Corp's British media arm firmly denies any obstruction of justice.
"You wouldn't be human if you weren't totally appalled by the revelations that have come to light, they're just stomach churning and I think everyone feels totally shaken," Culture Secretary Jeremy Hunt said in a television interview.
Both Hunt and Cameron, whose Conservatives lead the coalition government, have been accused by Labour of being too close to Murdoch and too slow to act to uncover the full extent of the scandal.
Andy Coulson, a former editor of the News of the World, was until earlier this year Cameron's spokesman, before he was forced to resign over the scandal.
Labour party leader Ed Miliband said on Sunday he would force parliament to vote this week if Cameron did not take steps to halt News Corp's $14-billion bid for the 61 percent of BSkyB that it does not already own.
He said on Monday the government had moved reluctantly. "They are doing it not because they want to, but because they have been forced to," Miliband said, urging Murdoch to "drop the bid for BSkyB".
A vote in parliament could split the coalition between Cameron's Conservatives and the Liberal Democrats who, traditionally less favoured by Murdoch's media, have signalled they could vote with Labour on the issue.
It would also give Labour a chance to cast itself as the champion of a public angered by allegations that News of the World reporters and editors were complicit in breaking into voicemails including those of bombing victims for stories.
Murdoch's own Sunday Times reported that a 2007 internal investigation at the News of the World had found evidence that phone hacking was more widespread than the company had admitted and that staff had illegally paid police for information.
Murdoch closed the News of the World last week in a bid to stem the crisis.
On Monday, The Guardian and Independent newspapers said News International journalists had repeatedly tried to hack into the telephone of former prime minister Gordon Brown. The Guardian also said a bank had unearthed evidence suggesting a "blagger" acting for the Sunday Times on six occasions posed as Brown and gained details from his account.
There was no immediate reaction from News International.
ROYALTY, 9/11 VICTIMS TARGETED
On Monday, the BBC said News International had bought phone details for the royal family from a security officer, citing company emails. "The implication, therefore, is that the security of the head of state was in some sense being threatened," said BBC business editor Robert Peston.
The Daily Mirror newspaper reported, citing an unidentified source, that News of the World journalists had offered to pay a New York police officer to retrieve the private phone records of victims of the Sept. 11, 2001, attacks.
There was no immediate comment from the company.
By referring it to the Competition Commission the deal could be blocked on grounds of media plurality but that would be better for Murdoch than if he and his team were found to be not "fit and proper" to run the broadcaster, as that could see him lose his existing 39 percent of the company.
(Additional reporting by Paul Sandle, Keith Weir, Tim Castle, Sudip Kar-Gupta, Sinead Cruise, Chris Vellacott and Michael Holden; writing by Philippa Fletcher; editing by Ralph Boulton)