* Kuttner, as managing editor, ran News of the World's finances
* Arrested on suspicion of graft, plot to intercept communications
* Spreading scandal shaking Britain's elite (Updates with Kuttner bailed)
By Michael Holden and Georgina Prodhan
LONDON, Aug 2 Stuart Kuttner, managing editor of the News of the World for 22 years, was arrested and later freed on bail on Tuesday over a phone-hacking scandal at the now-defunct tabloid that has rattled Britain's establishment, a source close to the case said.
Police said a 71-year-old man had been released on bail to an unspecified date later this month after being arrested on suspicion of corruption and conspiring to intercept communications. The source said the man was Kuttner.
News International, the British newspaper arm of News Corp, declined to comment.
A flood of revelations in the last month has generated a furore that has shaken Rupert Murdoch's media empire as well as Britain's press, police and political leaders.
Kuttner was responsible for authorising payments from the paper, which was part of Murdoch's News Corp . Lawmakers have been told that his office would have been responsible for any payments to private detectives.
He stepped down unexpectedly in 2009 just before the Guardian newspaper began to publish a series of stories that phone-hacking activity at the News of the World was far more widespread than had so far been investigated.
Tuesday's arrest was made by detectives conducting an inquiry into whether journalists and private investigators, seeking gossip for stories, illegally intercepted voicemail messages on mobile phones of people ranging from celebrities and politicians to murder victims and the families of dead soldiers.
ELEVEN ARRESTED OVER SCANDAL
Eleven people have now been arrested this year in connection with the escalating scandal, which has forced the resignations of ex-News of the World editor and Murdoch favourite Rebekah Brooks, and Britain's top two policemen.
Kuttner's arrest may increase pressure on Rupert Murdoch's son James, News International's chairman and until recently considered the heir apparent to the ageing mogul's media realm, who has pleaded ignorance of the hacking at the time.
Lawmakers have already indicated they want to recall James Murdoch to clarify evidence he provided to a parliamentary committee, after two ex-senior News International executives called it into question.
Murdoch told the committee he did not know the extent of phone-hacking at the tabloid when he approved a large payoff to one of the victims, but the former executives say they showed him evidence it was not limited to one "rogue" reporter.
In 2007, the tabloid's royal reporter Clive Goodman and a private detective, whose notebooks have since yielded thousands more names to be investigated, were jailed for hacking the phones of aides to Britain's royal family.
Police are also looking into claims some reporters paid bribes to police officers in return for information.
The 168-year-old News of the World was closed last month after allegations that 4,000 phones, including that of a murdered schoolgirl, had been hacked. News Corp was forced to drop a $12 billion bid for satellite broadcaster BSkyB .
The uproar has also caused severe embarrassment to Prime Minister David Cameron, who was championed by Murdoch's British newspapers in the 2010 national election campaign, since the arrest of his former media chief Andy Coulson.
Coulson was editor of the News of the World until he quit in 2007 when Goodman was jailed.
On Tuesday, a protester who disrupted the parliamentary hearing at which the Murdochs gave evidence by throwing a paper plate of foam at Rupert Murdoch was jailed for six weeks. (Additional reporting by Kate Holton and Stefano Ambrogi; Editing by Mark Heinrich)