* Year-long inquiry into UK press to disclose findings
* Could recommend new newspaper watchdog backed by law
* Lawmakers divided, Cameron trapped in the middle
By Michael Holden and Kate Holton
LONDON, Nov 29 Prime Minister David Cameron faces a no-win dilemma on Thursday when a far-reaching inquiry into British newspapers delivers its verdict on how to curb the excesses of the country's notoriously aggressive press.
Cameron, who was embarrassed when details of his personal links to Rupert Murdoch and his media empire emerged at the inquiry, will have to decide whether to accept its findings, which risk dividing his coalition government and angering an already hostile press.
He will give his response to the House of Commons after the report is published at 1330 GMT, under scrutiny from the chamber's public gallery filled with high-profile figures who have campaigned for a clampdown on an industry they say ruins lives.
The inquiry was ordered by Cameron following public outrage at Murdoch's now defunct News of the World tabloid, whose journalists had hacked the phone messages of schoolgirl Milly Dowler, who was later found dead.
Exposing the cosy relationships between political leaders, police chiefs and press barons, the inquiry revealed the "dark arts" of journalists seeking ever more salacious stories in a bid to hold up dwindling circulation figures.
Huge attention will be focused on whether Lord Justice Brian Leveson, one of Britain's top judges, recommends a new body to regulate the press with powers enshrined in law, or merely says the existing system of self-regulation should be overhauled.
He could also criticise Cameron's government, including one of his most senior ministers, Jeremy Hunt, for close ties to Murdoch's News Corp and their handling of the company's aborted bid to take control of pay-TV group BSkyB in what would have been its largest acquisition.
The press, backed by some 80 members of parliament, has lobbied hard for Cameron to resist calls for legislation, arguing it would curb freedom of speech and mean newspapers requiring state approval for the first time since 1695.
However, a similar number of lawmakers, as well as academics and celebrities, favour statutory regulation while opinion polls suggest the public also agrees.
The issue has divided the cabinet and could put the prime minister at odds with the leader of the Liberal Democrats, the junior partners in the coalition government.
"The status quo is unacceptable and needs to change," Cameron told parliament on Wednesday. "This government set up Leveson because of unacceptable practices in parts of the media and because of a failed regulatory system."
Some media have speculated that Cameron will give the press one last chance to get its house in order even if Leveson backs a new law, although critics say there have been similar repeated warnings for half a century, all of which have been ignored.
Under the watchful eye of Leveson, celebrities - including Hollywood actor Hugh Grant, Harry Potter author JK Rowling, singer Charlotte Church, Dowler's parents and other unknown Britons who found themselves in the media spotlight, told the inquiry how they had been harassed, bullied, and traumatised by the press.
Four prime ministers including Cameron were also quizzed in great detail about their links to newspaper owners, especially Murdoch, who himself endured two days of grilling, during which he denied playing puppet-master to those running the country.
The inquiry heard intimate emails and text messages between Cameron and Murdoch's top lieutenant Rebekah Brooks, who goes on trial next year over the alleged phone hacking.
"A lot of these very difficult decisions are no-win situations politically but what the prime minister wants to do is to do the right thing, and that's the kind of decision that will stand the test of time," Hunt, a former Culture Secretary and now Health Secretary, told Sky News.