Media tycoon Rupert Murdoch yesterday withdrew News Corporation’s £8 billion bid to take over satellite broadcaster BSkyB in a dramatic response to the “firestorm” of public and political anger over phone hacking at the News of the World.

The move came shortly after Prime Minister David Cameron appointed senior judge Lord Justice Leveson to head a public inquiry into the hacking allegations, and just hours before MPs were expected overwhelmingly to back a Labour motion condemning the takeover plans.

Mr Cameron said News Corp had made “the right decision” in dropping its bid to buy the 61per cent share in BSkyB which it did not already own, while his deputy Nick Clegg described it as “the decent and sensible thing to do”.

Labour leader Ed Miliband hailed the development as “a victory for people up and down this country who have been appalled by the revelations of the phone hacking scandal and the failure of News International to take responsibility”.

The collapse of the takeover bid was announced by News Corp deputy chairman Chase Carey, who said it had “become clear that it is too difficult to progress in this climate”. The company would remain “a committed long-term shareholder in BSkyB”.

Downing Street said that the Prime Minister received no advance notice of the announcement, which came less than two hours after his statement to MPs setting out the terms of Lord Leveson’s inquiry.

Welcoming the development, Mr Cameron said it was time to get on with the inquiry and with the continuing police investigation into claims that News of the World reporters illegally eavesdropped on private phone messages.

“I think this is the right decision,” said the Prime Minister. “I’ve been saying that 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.”

Lord Leveson’s inquiry will be able to summon newspaper proprietors, journalists, police and politicians to give evidence on oath and in public. It will have the same powers as the High Court to require people to give evidence, though it was not immediately clear how this will affect non-UK nationals such as News Corp chairman Mr Murdoch and his son James, the company’s chief executive in Europe.

Setting out the inquiry’s remit in the House of Commons, Mr Cameron said that those found to be responsible for wrongdoing at the News of the World should be barred from future involvement in the media industry.

“The people involved - whether they were directly responsible for the wrongdoing, sanctioned it, or covered it up, however high or low they go - must not only be brought to justice, they must also have no future role in the running of a media company in our country,” he said.

Mr Cameron made clear that this could include former News of the World editor Andy Coulson, who he appointed director of communications at 10 Downing Street last year.

Mr Coulson had given assurances, not only to him but also to the police, a parliamentary committee and under oath to a court of law that he was not involved in criminality at the paper, said the Prime Minister.

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