Murdoch's newspaper under investigation in Britain

Rupert Murdoch's takeover of B Sky B appeared to be dead in the water last night after proof emerged that executives at his British newspaper empire mounted a cover-up of the full scale of alleged criminal wrongdoing at the News of the World.

In another extraordinary day in the phone-hacking scandal, Downing Street sources confirmed that Government lawyers were drawing up a strategy to halt the £9bn deal which looked a certainty only a week ago.

As Nick Clegg threatened to split the Coalition by siding with a Labour plan to block the takeover, a senior Government source said last night: "We are working on a plan to suspend the deal while the police investigation is taking place. But we have to ensure it doesn't get thrown out by judicial review."

The U-turn came after one of News International's own papers revealed that an internal report carried out in 2007, after the News of the World's royal editor Clive Goodman was jailed, had found evidence that illegally accessing voicemails was more widespread at the paper – and that payments had been made to police officers.

An anonymous executive was quoted as saying that the report had been like a "ticking time bomb". The report suggests there was a deliberate cover-up by unidentified executives at News International, which had told Parliamentary inquiries in 2007 and 2009 there was no evidence journalists other than Goodman had been involved in phone hacking, nor that it had attempted to suppress evidence of illegality.

The collapse of the cover-up came as:

• Rupert Murdoch flew into London and was seen entering News International's Wapping HQ carrying a copy of the last ever News of the World.

• Labour leader Ed Miliband confirmed his party's opposition to the B Sky B bid and won backing from senior Lib Dems.

• One of Scotland Yard's most senior officers, John Yates, admitted that his decision to fend off demands for a re-opening of the criminal investigation into the NOTW had been "pretty crap".

• The parents of the murdered schoolgirl Milly Dowler, whose phone was targeted by the paper, prepared to travel to Downing Street to demand action over the growing scandal.

• The News of the World published its final edition after 168 years with the headline "Thank You & Goodbye", and and an apology for having "lost its way".

• An audacious bid was being made by to resurrect the Sunday paper.

The Government's U-turn over its backing for the B Sky B deal is a humiliation for the Prime Minister, who last week said he was powerless to stop it.

Liberal Democrat officials revealed Nick Clegg would back a Labour parliamentary motion calling for the takeover to be suspended, unless Culture Secretary Jeremy Hunt acted before a Commons debate on Wednesday. Ministers are thought to have been hoping Ofcom would block the deal under its "fit and proper persons" test for broadcasters, but with that looking unlikely before the end of the criminal investigation, they are taking action themselves. Lawyers in the Department of Culture, Media and Sport are thought to be looking at whether the assurances given by News Corporation on plurality can be trusted in light of the growing evidence of corporate wrongdoing. Yesterday, Mr Miliband warned Mr Cameron that unless there was action before Wednesday, he would force the issue to a vote in Parliament. He said: "I say this to the Prime Minister: over the next 72 hours I hope he changes his position."

Hours after flying into Britain, Mr Murdoch continued his support of Rebekah Brooks, the embattled chief executive of News International and former News of the World editor. But the company came under further pressure as it emerged that unidentified NI executives knew as far back as 2007 that criminality at the title was apparently widespread. It subsequently insisted that only Goodman had been to blame, telling Parliament that there was no evidence other journalists were involved.

Following allegations that the victims of phone hacking spread far beyond royal aides and the five individuals identified at the trial of Goodman and private investigator Glenn Mulcaire, News International carried out a "thorough investigation" in 2009. Apart from Goodman and Mulcaire, it said there was no no evidence that "News of the World journalists have accessed the voicemails of any individual" or "News of the World or its journalists have instructed private investigators or other third parties to access the voicemails of any individuals".

Scotland Yard, whose Assistant Commissioner John Yates said in an interview that he had failed to carry out a proper review of the evidence in 2009, now concedes that there are almost 4,000 victims of phone hacking. Company sources last night said that neither Ms Brooks nor James Murdoch, News Corp's European chief executive, had seen the 2007 report until April.

It was also reported today that victims of the 9/11 attacks in New York could also be among those targeted by phone hackers from the News of the World. The Daily Mirror cites an unnamed source claiming that a former police officer, working as a private investigator, was asked by News of the World journalists to retrieve the private phone records of those killed in the attack.

Today the family of Milly Dowler will meet Mr Clegg. The paper that hacked their daughter's phone printed its last edition yesterday, saying it had carried out important investigative journalism. Its front page said: "After 168 years, we finally say a sad but very proud farewell to our 7.5m loyal readers."

How Murdoch's lieutenants pleaded ignorance

• 06.03.2007 John Whittingdale (DCMS Select Committee chairman): "You carried out a full, rigorous internal inquiry, and you are absolutely convinced that Clive Goodman was the only person who knew what was going on?" Les Hinton: "Yes, we have and I believe he was the only person, but that investigation, under the new editor, continues."

• 21.07.2009 Tom Crone: "At no stage during their [the police's] investigation or ours did any evidence arise that the problem of accessing [voicemails] by our reporters, or complicity of accessing by our reporters, went beyond the Goodman/Mulcaire situation." Asked whether any journalists other than Goodman dealt with Mulcaire, he said: "No evidence was found."

• 21.07.2009 After Philip Davies MP suggested journalists other than Clive Goodman must have been involved, Myler said: "No evidence, Mr Davies, has been produced internally or externally by the police, by any lawyers, to suggest that what you have said is the truth, is the case."

• 21.07.2009 "As far as I am aware, there is no evidence linking the non-royal phone-hacking allegations that were made against Glenn Mulcaire to any member of the News of the World staff. I think that Clive was a rogue case on the News of the World."

• 15.09.2009 "... There was never any evidence delivered to me that suggested that the conduct of Clive Goodman spread beyond him."

It was also reported today that victims of the 9/11 attacks in New York could also be among those targeted by phone hackers from the News of the World.

Isn't it convenient, that this absent Prime Minister, has been able to dodge the real questions of what did he know about criminal activities from Murdoch? When did he know it? And isn't it time, based upon the British public's reaction, that we send this non-tax-paying Murdoch back to whence he came, and for the final humiliation, get the Secretary of State for Energy to drive him to the airport?