UPDATE 3-News chief steps aside as BBC crisis deepens
* BBC News head and deputy step aside for review on abuse report
* BBC chief quits over "shoddy journalism"
* 'Reform or die' warns BBC Trust Chairman Patten
* UK government questions 450,000-pound ($716,000) payout
By Kate Holton and Guy Faulconbridge
LONDON, Nov 12 (Reuters) - The head of news at the British Broadcasting Corporation stepped aside on Monday after a programme falsely accusing a former senior politician of child abuse sparked one of the worst crises in the publicly-funded broadcaster's 90-year history.
The BBC has been rocked by two news programmes, one that falsely accused the politician which was broadcast this month, and another which alleged child sex abuse by a former star presenter, the late Jimmy Savile, but which was not aired.
The affair, which raised questions about ethics, competence and management at the BBC, has claimed the scalp of Director General George Entwistle and prompted its chairman to warn that the world's biggest broadcaster was doomed unless it reformed.
The saga has also called into question the role played by Mark Thompson, the former BBC director general who became the chief executive of the New York Times Co on Monday.
Helen Boaden, director of BBC News, and her deputy Stephen Mitchell, stepped aside pending a review of why editors spiked the report last year on Savile, who has been accused of abusing children on BBC premises.
Some BBC staff cast the 22,000-strong Corporation as a bureaucratic behemoth where journalistic talent is throttled by incompetent managers, and opponents - and even some allies - questioned whether it could survive in its current form.
"Everything is in play and I think this is becoming an existential threat to the BBC, not just in terms of the future of the corporation in its current form but in terms of the concept of public service broadcasting as a whole," said a source close to the inner workings of the BBC.
"They are fast running out of options, they're half way down the management list already," said the source, who asked for anonymity because of the sensitivity of the situation.
As well as broadcasting in Britain, the BBC World Service has built an exceptional reputation around the globe reaching about 180 million people in 32 languages through its radio, TV and online services.
ROW ERUPTS OVER PAY-OFF
Entwistle resigned as director general on Saturday, just two months into the job, to take responsibility for the report which wrongly said an unidentified Conservative figure from the era of Prime Minister Margaret Thatcher had raped boys in social care.
But the man, later identified on the Internet as Lord Alistair McAlpine, vehemently denied the allegation and his lawyer threatened legal action against Newsnight, the BBC's flagship current affairs show which broadcast the allegations.
The BBC apologised for the report, which it said was shoddy journalism and wrong after the abuse victim who was the source of the allegation said it was a case of mistaken identity.
Entwistle's exit failed to cool the crisis: the government said it was hard to justify his payoff of a year's salary of 450,000 pounds ($715,900) from an organisation funded by a 145.50 pound annual levy on households with a television.
"In terms of the public funding the BBC does itself absolutely no favours by promptly dispatching Mr Entwistle with a big pay off," Angie Bray, a Conservative lawmaker and member of parliament's media committee, told Reuters.
Chairman of the BBC Trust Chris Patten, who appointed and then accepted Entwistle's resignation, said the settlement was justified.
Viewers were unimpressed. "I'm upset, they've messed up. I've just paid my licence fee as well and they've gone and rewarded this guy with a massive payoff," said Patrick Daguiar, 49, at London's Liverpool Street Station.
BBC staff say the poor handling of the abuse allegations against Savile, a DJ turned television star who is suspected of sexually abusing dozens of children, and the flawed Newsnight report showed the broadcaster had veered far from its roots.
Disturbed by both the commercialism of American radio and the state controls imposed in the Soviet Union, the BBC's founding father, John Reith, had intended the BBC to educate, inform and entertain when it was founded in 1922.
But staff said bureaucracy had become bloated, including under Entwistle's predecessor Thompson who served as director general from 2004 to 2012.
"It is still over managed and the management still speak gobbledygook (nonsense)," said David Dimbleby, one of the BBC's most accomplished broadcasters.
Criticised by both Conservative and Labour governments, the BBC's last major crisis was in 2004 when a public inquiry over a report alleging government impropriety in the build-up to the war in Iraq led to the resignation of both Director General Greg Dyke and Chairman Gavyn Davies.
Commercial rivals, including publications owned by Rupert Murdoch's News Corp, called for Patten to resign.
"Patten represents all that is worst about public sector complacency," the Sun said in its editorial under the headline "Busted Beeb".
When asked if Cameron still had confidence in the 68-year-old Patten, himself once a senior Conservative politician, the prime minister's spokesman said: "Yes."
"The important thing is for Chris Patten to lead the BBC out of its present difficulties and that has to be the priority," the spokesman said.
Patten, best known for handing control of Hong Kong back to China in 1997, told the BBC on Sunday that without public trust the BBC was doomed.
A poll commissioned by the BBC after the Savile revelations but before the latest debacle showed that public confidence in the broadcaster had declined. The poll showed 47 percent of respondents said they felt the BBC could no longer be trusted while 45 percent did trust the corporation.
When a similar study was undertaken in 2009, 62 percent of people felt the BBC was a trusted source.
"The BBC is all about trust. The BBC needs to be trusted. If we haven't got that, we don't have anything," acting Director General Tim Davie told the BBC.