What a bitter defeat for Rupert Murdoch. His News Corp this morning just finally made clear it has withdrawn its bid for full control of British Sky Broadcasting. The news comes as British lawmakers were about to demand that Murdoch give up his goal of taking complete control over the lucrative U.K. broadcaster in a $14 billion bid for the 61% of the pay-TV operator that News Corp doesn’t already own outright. News Corp wanted to get its hands on all the UK satellite giant’s swelling £5.7 billion ($9 billion) revenues. It would have cemented Rupert’s position as the most powerful media baron in Britain and this as the biggest deal of his storied career. So the decision to withdraw his bid can be seen as his biggest business debacle as BSkyB was the last and most important piece of his ambitious plan to control satellite TV across the globe. Here’s the official News Corp statement, which trots out Murdoch’s No. 2 Chase Carey for the first time, presumably because he’s the only News Corp top exec left unblemished by the phone-hacking scandal and its subsequent cover-up and fall-out:

News Corporation (“News Corp”) announces that it no longer intends to make an offer for the entire issued and to be issued share capital of British Sky Broadcasting Group PLC (“BSkyB”) not already owned by it. Chase Carey, Deputy Chairman, President and Chief Operating Officer, News Corporation, commented: “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. News Corporation remains a committed long-term shareholder in BSkyB. We are proud of the success it has achieved and our contribution to it.”

The scandal sank a deal worth more than all of Murdoch’s papers combined. It was to have been approved at the start of last weekend but then was delayed until the Fall and then until 2012 because of the outcry. In an about-face today, British Prime Minister David Cameron put his party’s weight behind an opposition Labour Party motion up for a vote declaring that News Corp’s bid for full control of BSkyB would not be in the national interest. Meanwhile, Britain’s House of Commons was preparing to endorse a resolution urging Murdoch to withdraw his bid for BSkyB. Cameron told the body today that the scandal raised “serious questions” about the mogul’s fitness to run the country’s largest pay TV company. A government inquiry, he said, would consider “the way in which [News Corp] management failures may have allowed this to happen.” Leaders of all three major political parties are supporting the resolution, which would not be binding. But UK observers said it loomed as a powerful expression of the tide running against Murdoch’s newspapers.

Had Murdoch been successful, he would have been the UK’s leading television gatekeeper determining what channels could thrive or fail. BSkyB also is a major provider of broadband and phone services, which makes it a dependable source of cash. When Murdoch made his formal bid for BSkyB last year, COO Carey said that it “presents an opportunity to consolidate a core business with which we have been closely associated for over two decades. News Corporation will also benefit from increasing the geographic diversification of our earnings base, reducing our exposure to cyclical advertising revenues and increasing our direct consumer subscription revenues.”

As a minority owner of BSkyB, Murdoch does not have direct access to the satellite company’s cash flow of more than $800 million a year. Investors also didn’t give News Corp the credit for its BSkyB holdings that Murdoch felt his company deserved. But shareholders had mixed feelings about the acquisition. Many wanted Murdoch to use his resources to buy back shares — in effect, give money back to investors. Both News Corp’s and BSkyB’s share prices have been falling, and yesterday News Corp announced a $5 billion stock buyback plan.

The withdrawal of News Corp’s BSkyB bid follows British regulatory concerns as to whether News Corp would be a fit-and-proper owner for BSkyB in light of the worsening phone-hacking scandal and its reach to top execs with the Big Media giant. Heir apparent James Murdoch has admitted News International effectively misled the UK Parliament while he approved secret out-of-court settlements for illegal activity. Murdoch’s Dow Jones & Co CEO Les Hinton is under fire for failing to come clean about the scandal when he was executive chairman of News of the World‘s owner News International. And last weekend Rupert Murdoch himself put on a show for the cameras of standing beside his CEO of newspaper division News International, Rebekah Brooks, who was editor of News of the World when the alleged phone hacking of murdered schoolgirl Milly Dowler and families of London bombing victims took place. (In perhaps the most egregious incident, investigators hired by News of the World admitted to erasing messages on the cell phone of the young murder victim, leading police to mistakenly believe she may have been still alive.) The newspaper’s reporters, with the admitted knowledge of Brooks and others, also paid off police officials in exchange for information on numerous investigations. The ever-widening scandal now includes as many as 4,000 individuals who may have been the targets of unlawful phone call intercepts, including British soldiers killed in Afghanistan and victims of terrorist attacks.

Needless to say, all this is highly illegal, which is why British politicians were distancing themselves including PM Cameron whose own media strategist, News of the World’s former editor Andy Coulson, was just arrested on July 8th for his role as was the paper’s former royal family correspondent. Coulson, along with Rebekah Brooks and James Murdoch, are believed to have had explicit knowledge of the phone-hacking activities as part of the paper’s zeal in pursuing its sensational stories. James has acknowledged that he personally approved the payment of nearly £2 million to silence two of the resulting lawsuits against the company.

Editor-in-Chief Nikki Finke - tip her here.

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