(Top) Murdoch leaves the News International office in London and Cameron outside 10 Downing Street. (AP)

London, July 13: In a stunning setback after days of scandal surrounding its British newspaper operations, Rupert Murdoch’s News Corporation today announced that it was withdrawing a $12 billion bid to take over the shares it does not already own in Britain’s main satellite television broadcaster.

The withdrawal from the bid for complete control of British Sky Broadcasting, also known as BSkyB, represented the most severe damage inflicted so far on Murdoch’s corporate ambitions by the scandal.

Only a week ago, Murdoch hoped to contain the damage by shutting down his 168-year-old tabloid, the News of the World, which had admitted to ordering the hacking of the voice mail of Milly Dowler, a 13-year-old girl abducted and murdered in 2002.

Since then, virtually every day has brought dizzying new disclosure and developments, culminating in News Corporation’s announcement today.

In a statement, Chase Carey, the company’s deputy chairman, president and chief operating officer, said: “We believed that the proposed acquisition of BSkyB by News Corporation would benefit both companies but it has become clear that it is too difficult to progress in this climate.”

As the announcement was made, Prime Minister David Cameron met Milly Dowler’s parents at 10 Downing Street.

It was unclear whether the move would mute the outcry against Murdoch’s operations in Britain. Within minutes of News Corporation’s announcement, politicians from the Labour Opposition and the Liberal Democrat junior coalition partner said competition authorities should investigate whether to challenge the Murdoch family’s existing 39 per cent stake in BSkyB.

Ofcom, the media regulator, said it would continue its scrutiny of BSkyB’s ownership structure.

According to British law, News Corporation would be allowed to make another bid for the BSkyB shares it does not already own in six months. Some analysts said another bid is indeed likely, but that the company would in all likelihood have to wait until investigations into the phone-hacking and bribery allegations were completed.

As the announcement was made, the chief lawyer for News International, Tom Crone, confirmed reports that he was quitting after 26 years at the paper. Officials at the company said that Crone had been the lawyer chiefly responsible for clearing controversial stories published in the News of the World and another paper in the Murdoch stable, the Sun.

His resignation made him the first senior executive of the News Corporation’s British subsidiary to quit in the scandal.

In Washington, Sen. Jay Rockefeller, a West Virginia Democrat and the chairman of the Senate Commerce Committee, said he had asked officials to investigate whether any News Corporation entities in the US had employed illegal methods in their news gathering operations.

Only hours before News Corporation’s announcement, Cameron had sought to distance himself from Murdoch and had urged him to drop the bid for BSkyB, reversing his previous support. The announcement came just before parliament was set to approve a cross-party call for Murdoch to abandon his long-cherished desire to take full control of the lucrative satellite broadcaster — a deal regarded as the cornerstone of his strategy for corporate expansion.

Cameron said Murdoch executives should “stop the business of mergers and get on with cleaning the stables”.

The scandal has also convulsed British politics, the press and the police, forcing them to contemplate unheard of scrutiny of their sometimes incestuous ties.

A criminal investigation and a public inquiry have been spawned as a direct result of allegations that journalists from Murdoch newspapers may have tried to hack the phones of families of soldiers killed in Iraq and Afghanistan and made illicit payments to corrupt police officers.

But given Murdoch’s towering influence in British public life, the scandal has also cast unusually sharp light on a world of cozy relationships between political and corporate leaders and senior police officers.

Today, Cameron offered details for the first time of a broad inquiry into those relationships to be led by a senior judge, Lord Justice Brian Leveson. Cameron told Parliament that it would have the power to summon witnesses to testify under oath.

The announcement came as Cameron fought to recover the initiative in a scandal that has turned into potentially the most damaging crisis of his time in office, partly because of his own close relationship with senior figures in Murdoch’s British subsidiary.

He said the inquiry would examine the ethics and culture of the British media.