LONDON (Reuters) - Rupert Murdoch withdrew his bid for broadcaster BSkyB on Wednesday, as outrage over alleged crimes at his newspapers galvanized a rare united front in parliament against a man long used to being courted by Britain's political elite.
The Australian-born billionaire's U.S.-based News Corp, thwarted in a key move to expand its media empire in television, said it would keep its 39 percent of the highly profitable pay-TV network, but left investors guessing over whether it might try again to buy up the rest, or even sell up.
The withdrawal removes the most pressing political conflict the company faced. But a police probe and new public inquiries into the scandal and into media regulation as a whole may keep an unflattering spotlight on it and weaken the influence the 80-year-old media magnate has enjoyed in Britain for decades.
"Successive prime ministers have cozied up to Murdoch," said politics professor Jonathan Tonge of Liverpool University.
"Now it's a new era. Political leaders will be falling over themselves to avoid close contact with media conglomerates. This is a turning of the tide. It's parliament versus Murdoch."
While there was no clear legal obstacle to letting the bid proceed via a regulatory review, having won informal government blessing some time ago, even Murdoch's dramatic closure of the scandal-hit News of the World tabloid had failed to stem public anger, leaving the $12-billion buyout politically untenable.
"With such universal political disapproval it would have been foolhardy to carry on," said stock analyst Steve Malcolm at Evolution Securities. "It would be a futile pursuit."
Conservative Prime Minister David Cameron, under fire over his own ties to former News of the World journalists, threw his government's weight behind an opposition motion on Wednesday that denounced Murdoch's bid to extend his media power while police were investigating whether his journalists hacked into the voicemails of thousands of people in search of stories.
"It has become clear that it is too difficult to progress in this climate," News Corp deputy chairman Chase Carey said, adding that the group, whose top executives have gathered in London, remained "a committed long-term shareholder" in BSkyB.
Shares in News Corp, also owner of Fox television and the Wall Street Journal in the United States, had shed 15 percent in a week on fears of widening damage to its brands and a loss of opportunity in television. They ended the day up 3.8 percent as investors welcomed relief from poisonous publicity.
BSkyB closed up around 2 percent.
Shareholders had been concerned by talk from politicians in the United States and Australia about mounting investigations. In Washington, three senators said on Wednesday that the Justice Department and securities regulator should investigate whether News Corp broke laws in the United States over phone hacking.
There have been reports that families of victims of the 9/11 attacks may have been targets of would-be phone hackers.
A Justice Department spokeswoman said they would review the letters sent by the senators as part of standard practice, but that did not mean an investigation would be initiated.
For a week, Britain has been in uproar since a major turn in the long-running saga of phone-hacking by the News of the World. Rival newspapers published allegations that, far from being limited to spying on the rich or powerful, the practice extended to victims of crimes, including child murders and the 2005 London bombings, as well as to parents of Britain's war dead.
Cameron has been embarrassed by the arrest of his former spokesman -- a former News of the World editor -- and has had little choice but to follow the popular mood against Murdoch and
News International, News Corp's powerful British newspaper arm which also owns the best-selling Sun tabloid and London's Times.
"This is the right decision," Cameron said of the withdrawal of the BSkyB bid. "This company clearly needs to sort out the problems there are at News International, at the News of the World. That must be the priority, not takeovers."
New Labour leader Ed Miliband has, despite his party's own long courting of Murdoch, emerged with his hitherto modest standing somewhat burnished by his stand on the bid. He said: "This is a victory for people up and down this country who have been appalled by the revelations of the phone hacking scandal.
"People thought it was beyond belief that Mr Murdoch could continue with his takeover after these revelations ... Nobody should exercise power in this country without responsibility."
The show of cross-party unity against Murdoch in parliament was short-lived, with both Cameron and his Labour predecessor Gordon Brown having to defend their contacts with the press baron against rumbustious questioning from the opposing benches.
Cameron said there had been mistakes all round, leading to a "firestorm" engulfing parts of the media, police and the political system. Brown has spoken out with emotion of having his baby son's illness revealed by a Murdoch tabloid.
The four-sentence statement from News Corp left the door open to a new offer to buy out other BSkyB shareholders at some point.
Chris Marangi, portfolio manager at News Corp shareholder Gabelli Multimedia Funds said: "This is not surprising, it doesn't mean the desire's not there. It's politically savvy, and he needs to buy his time and let this blow over ... At the time, it's circle the wagons and protect existing operations."
Several former employees of News International have been arrested this year after police reopened inquiries which they had dropped in 2007 following the jailing of the News of the World's royal correspondent and a private investigator.
Those under suspicion of phone hacking and of bribing police include former editor Andy Coulson, whom Cameron hired as his spokesman in 2007 after the hacking scandal first broke. Coulson left the prime minister's office in January and, like other News of the World staff, denies knowing of any wrongdoing.
In the most senior departure from the organization since Coulson, the legal manager of News International, Tom Crone, has left the company, a source familiar with the matter told Reuters. He has been closely involved in the company's defense.
That for years consisted of blaming one "rogue reporter" but has shifted to accept possibly wider problems.
Murdoch flew in from the United States at the weekend to take command, alongside his son and heir apparent James and Rebekah Brooks, the News International chief executive. She was Coulson's predecessor at the News of the World at a time when some of the gravest alleged misdeeds took place.
Giving details to parliament of a formal public inquiry into the affair, to be chaired by a senior judge, Brian Leveson, Cameron said that senior executives, however high in the Murdoch organization, should be barred for life from the British media if found to have taken part in any wrongdoing.
Cameron has said Brooks, a frequent guest at his home and a close confidante of Murdoch, should quit. Many of the 200 staff sacked from the News of the World have complained that their jobs were sacrificed in an effort to create a firebreak designed to stop the scandal hitting Brooks or the Murdoch family.
Rupert and James Murdoch and Brooks have been summoned to answer questions by a parliamentary committee next week. As U.S. citizens, the Murdochs need not attend.
Former premier Brown raised pressure on Brooks by telling parliament that, in 2002, she had been told by police about "serious malpractice" by News of the World journalists and by investigators carrying out surveillance on their behalf.
Tom Watson, a Labour member of parliament who campaigned against police and political reluctance to widen the inquiry into phone hacking after 2007, said News Corp still faced tough questions after dropping the BSkyB bid: "Like everything with this company they were dragged into it kicking and screaming.
"We've still not seen anyone of the top take responsibility for creating a culture in a newsroom that would allow a journalist to target the phone of an abducted 13-year-old girl. Until somebody carries the can and somebody apologizes at the top of that company I just think this is going to run on and on."
News International has said it is cooperating fully with the police investigation. Police, who have been under fire themselves for failing to probe deeper earlier, say they have nearly 4,000 names to look into in the files of the former News of the World investigator jailed for phone hacking.
Police have contacted fewer than 200 of those people so far.
The scandal may have wider implications for the relationship between politicians and the media in Britain.
"This could herald a new era in British politics in which politicians and journalists are more cautious in how relationships are developed," said Mark Wickham-Jones, politics professor at Bristol University.
Steven Fielding at Nottingham University questioned how much could change: "People will forget what the News of the World did ... and that people's desire for tittle-tattle, regardless of how it is found, will remain. Ultimately, there's a reason why politicians sucked up to Rupert Murdoch and to others ... They inherently need to get on well with the press."
Many politicians believe that journalistic misdeeds have not been restricted to News International. Allegations surfaced this week of possible phone hacking by other tabloids and police raided the offices of the Daily Star last week.
That has increased pressure for formal regulation of the British press which, while restricted by draconian defamation laws, is otherwise subject to a voluntary code of conduct.
Additional reporting by Keith Weir, Mohammed Abbas, Avril Ormsby, Michael Holden, Matt Scuffham, Douwe Miedema and Jodie Ginsberg; Writing by Alastair Macdonald