* Murdoch says does not want hacking scandal to damage BSkyB
* Decision ahead of crucial parliamentary report
* Investors welcome move
By Kate Holton and Georgina Prodhan
LONDON, April 3 James Murdoch resigned as chairman of BSkyB on Tuesday to prevent his links to a tabloid phone-hacking scandal from undermining the pay TV group, which has so far escaped the worst of the damage convulsing its controlling shareholder News Corp.
In a bitter blow to Murdoch, until last year seen as heir apparent to his father Rupert's media empire, James said he would step down from the British pay-TV company where he made his name as a talented executive in his own right.
"I am aware that my role as Chairman could become a lightning rod for BSkyB and I believe that my resignation will help to ensure that there is no false conflation with events at a separate organisation," Murdoch said.
The 39-year-old is a previous chairman of News International, News Corp's British newspaper arm that published the News of the World tabloid at the heart of the scandal. News of the World was shut down last year.
"As attention continues to be paid to past events at News International, I am determined that the interests of BSkyB should not be undermined by matters outside the scope of this company," Murdoch wrote in a letter to the BSkyB board.
The youngest son of Rupert had long held off the demands for him to step down at BSkyB, where he earlier overcame allegations of nepotism to prove his critics wrong with an assured four years as chief executive (2003 to 2007) and an expansion of the business.
James Murdoch's conduct now, however, is under scrutiny by a powerful parliamentary committee that is expected to deliver a critical report in the coming weeks, as well as by the UK TV regulator and a judge-led inquiry into press ethics.
The regulator, Ofcom, has been investigating whether BSkyB is a suitable owner of a broadcast licence given its close relationship with Murdoch and its 39 percent owner News Corp.
"We continue to gather evidence which may assist us in assessing whether BSkyB is and remains fit and proper to continue to hold its broadcast licences," a spokesman said.
Murdoch arrived at News International after the phone-hacking had died down but has been criticised for failing to uncover the scale of the wrongdoing.
He will remain on the BSkyB board and will be replaced as chairman by Nicholas Ferguson, who was previously deputy chairman and senior non-executive director.
While people close to the company said News Corp remains "fully committed" to James Murdoch's role with the company, this latest resignation will raise questions about his future at the New York-based company he has long been expected to run when his father Rupert, 81, steps down.
A person familiar with the company summed up James' reputation in the U.S. as "shaky" and said that in his opinion, News Corp President Chase Carey should be made CEO.
"Rupert would definitely like to have one of his kids run the company, but the best-laid plans go awry."
The problem for James Murdoch has been the unpredictability and the scale of the new information that has come out of internal and external inquiries into the phone-hacking issues.
When it comes to the investigation "more stuff keeps popping up" and "I have no idea where this investigation is going to lead," said the person.
Investors and analysts welcomed James Murdoch's resignation, although they said they had no complaints about Murdoch's conduct at BSkyB. Shares in BSkyB were largely unaffected, closing down 0.8 percent and broadly in line with the FTSE 100 Index.
"He's stepped aside to ensure that his personal issues are no longer issues that could affect BSkyB," said Cato Stonex, partner at Taube, Hodson and Stonex, a top 15 Sky investor.
"I have said before that if he was no longer considered to be a fit and proper person, then he could no longer be a director. This is a sort of halfway house. It is a pity but I can understand why he has done it."
Thomas Eagan, a U.S.-based analyst with Canaccord Genuity, said: "I think it makes it easier for News Corp to pass the fit and proper test and it is a gesture made by Sky and News Corp for them to keep their licence."
Rupert Murdoch and News Corp Chief Operating Officer Chase Carey said they were grateful for James's leadership of BSkyB. "He has played a major role in propelling the company into the market-leading position it enjoys today," their statement said.
A source close to the company said James would retain his position on the News Corp board, although other News Corp executives have suggested he will struggle to take over the top job, and indicated the focus could turn to his sister Elisabeth.
After long denying that phone-hacking was institutionalised at the News of the World, the tabloid eventually admitted last year it had hacked into the phones of a murdered schoolgirl and British war dead as well as politicians and celebrities in its search for ever more-sensational front-page stories.
The affair rocked the British newspaper establishment, politicians and police, as links were exposed between the powerful Murdoch press, Prime Minister David Cameron and senior police officers, two of whom resigned.
Cameron was forced to accept the resignation of his spokesman, ex-News of the World editor Andy Coulson, and was cornered by opposition leaders newly emboldened to challenge Rupert Murdoch's long-established influence over the government.
James Murdoch has continued to plead his innocence but the investigations have hurt his chances of inheriting his father's media empire, once thought to be his for the taking.
"You've got to see whether he can really seal himself off from any further criticism," said media commentator Roy Greenslade, a former Murdoch editor, adding that investigations by U.S. authorities would be key.
The Federal Bureau of Investigation has been looking into News Corp practices. To date, its investigation has found no evidence of phone hacking or other questionable reporting practices inside the U.S., a law enforcement source said on Tuesday. The source said an investigation into possible violations of the U.S. Foreign Corrupt Practices Act, which prohibits U.S. companies from bribing foreigners, is continuing.
As well as an investigation into phone-hacking, British police are also probing allegations of bribery and computer hacking by News International.
Murdoch, who was previously chief executive of BSkyB, was dealt a heavy blow in November when more than 40 percent of the company's independent shareholders failed to back his re-election as chairman.
Since then he has stood down from his board positions at News Corp's British newspaper arm, as well as from the boards of other companies, and moved to the United States to take up his new role running international pay-TV.
Greenslade said the multiple investigations into News International and its executives, with both James and Rupert Murdoch expected to be hauled in front of a judge-led inquiry in the coming weeks, had likely prompted James's departure.
"I do think the Leveson inquiry, Commons Select Committee report and the Ofcom fit and proper test are a triple whammy. He really must have known it was better to go sooner rather than later," he said.
The chairman of the parliamentary select committee, John Whittingdale, told Reuters that James Murdoch had not seen its forthcoming report.
"We have not given wind to anybody of what might be in the report," he said, adding that the removal of Murdoch as chairman of BSkyB would allow the successful pay-TV group to distance itself from the wider problems at News Corp.