UPDATE, 10 AM: News Corp chairman and CEO Rupert Murdoch has issued a statement on the phone-hacking matter for the first time, calling the allegations that came to light “deplorable and unacceptable.” He also showed support for News International boss Rebekah Brooks, who was the editor at News of the World at the time of the alleged actions. “I have made clear that our company must fully and proactively cooperate with the police in all investigations and that is exactly what News International has been doing and will continue to do under Rebekah Brooks’ leadership,” Murdoch said. In a rare public statement, the News Corp boss said that Joel Klein, CEO of the media giant’s education unit, and independent News Corp director Viet Dinh, a former U.S. assistant attorney general, were keeping News Corp’s New York-based board abreast of the crisis.

Meanwhile, UK Prime Minister David Cameron has promised to set up a public inquiry into phone hacking at Murdoch’s News of the World tabloid. Cameron told the House of Commons this afternoon that allegations over the voicemail of murdered schoolgirl Milly Dowler being hacked were “disgusting”. Executives at News International say they have discovered who authorized the hacking of the then-missing 13-year-old schoolgirl’s phone. Because some messages were deleted, space was freed up on the Dowler’s voicemail, encouraging families to believe she was still alive and listening to messages.

Commercial pressure is also increasing on News Corp. Car manufacturers including Vauxhall, Ford and Mitsubishi have pulled ads from this Sunday’s News of the World because they do not want to be associated with the paper. The deeper question remains how this will affect News Corp’s long-in-the-works takeover of pay-TV giant BSkyB. Cameron dismissed calls for the deal to be blocked because the phone hacking/bribery scandal has nothing to do with the terms of the deal. BSkyB’s board will now try and extract a higher price for the pay-TV behemoth given the increasing uncertainty. The deal may be delayed. Media regulator Ofcom could decide that News Corp is not a “fit and proper” owner of BSkyB. But David Elstein, former programming head of BSkyB, tells me the crisis could perversely work in News Corp’s favor: If News Corp walks away, then BSkyB’s share price would collapse, he says. Murdoch could then come back in six months and lift News Corp’s stake to 50% at less than £7 a share, giving it majority control and a majority on the board. “There are no other buyers for BSkyB,” he reminds me.
PREVIOUS, 7:47 AM: News Corp’s long-in-the-works takeover of BSkyB could be delayed by allegations that Rupert Murdoch’s UK newspaper journalists hacked into the voicemails of families of 7/7 London bombing victims –- as well as that of 13-year-old murder victim Milly Dowler. The board of BSkyB is alarmed by the deepening scandal at Murdoch’s newspaper arm News International, I’m told. (You can imagine the revulsion here — it’s as if journalists at Murdoch’s New York Post hacked into the voicemails of families of 9/11 victims.) Now would not be the right time for News Corp to bid for the 61% stake in the pay-TV behemoth that it does not already own, say insiders.

BSkyB’s board realizes this deal has become hugely risky and therefore has a fiduciary duty to ask for more money. Prime Minister David Cameron signaled in the House of Commons this afternoon that the deal would go through despite rival media groups Guardian Media Group and Trinity Mirror calling for it to be put on hold. The latest consultation on the plan closes at noon Friday; Culture Secretary Jeremy Hunt was expected to approve the deal before the end of the month. Any delay would be good news for shareholders, as the eventual price will be much higher than the 700p per share that News Corp first offered. City investment bank Numis Securities says that 850p per share would be the right price. BSkyB’s share price was down 1.2% at 835p this morning. Advertisers Lloyds, Virgin Holidays and car maker Ford have already halted advertising in the News of the World, the tabloid at the center of the scandal.

Pressure is mounting on News International CEO Rebekah Brooks to resign. She was editor of the News of the World when the alleged phone hacking took place. She denies knowing anything about it and said in a memo to staff it was “inconceivable” that she “sanctioned these appalling allegations”. Even if Brooks does eventually resign, the damage the scandal is wreaking on News Corp’s reputation seems to me unmendable. It reminds me of those knives English soccer hooligans carry with two blades set a little apart so that the victim’s wound never heals.