* Year-long inquiry into UK press to disclose findings
* Could recommend new newspaper watchdog backed by law
* Lawmakers divided, PM Cameron trapped in the middle
* Deputy PM Clegg to make separate statement after PM -source
By Michael Holden and Kate Holton
LONDON, Nov 29 (Reuters) - 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 toe-curling details of his cosy texts to one of media tycoon Rupert Murdoch's lieutenants emerged at the inquiry, will have to decide whether to accept its findings and anger a hostile press and many in his own party, or reject them and risk dividing his coalition government.
He will also be conscious of the weight of expectation from a public that was scandalised to learn that journalists hacked the phones of victims of crime, wined, dined and paid police for leads and were in constant touch with senior politicians.
Cameron will give his response to the House of Commons after the report is published at 1330 GMT, under scrutiny from high-profile figures such as Hollywood actor Hugh Grant who have campaigned for a clampdown on an industry they say ruins lives.
The issue has divided the cabinet and could put the prime minister at odds with Nick Clegg, the leader of the junior Liberal Democrat partners in the coalition government.
Following talks between the leaders on Thursday, a Liberal Democrat source said Clegg would deliver his own statement to parliament after Cameron, implying that the two disagree on the way forward. However the source played down suggestions of a major breach in the coalition.
The inquiry was ordered by Cameron following public outrage at Murdoch's now defunct News of the World, a News Corp tabloid whose journalists hacked the phone messages of missing schoolgirl Milly Dowler, who was later found dead.
Exposing the close ties 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.
"For today Britain stands at a crossroads," Murdoch's Sun tabloid said in its leader column. "In one direction: Official control of papers, with state sensors approving stories. In the other direction: A free press under stricter self-governance."
However, a similar number of lawmakers, as well as academics and celebrities, favour statutory regulation, and opinion polls suggest the public agrees.
A poll for the BBC said two thirds of people do not trust newspapers to tell the truth, while almost half want the industry to be regulated by a body backed by the courts.
"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.
Under the watchful eye of Leveson, celebrities including Harry Potter author JK Rowling, singer Charlotte Church, Dowler's parents and other 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.