Britain's biggest-selling newspaper the News of the World is being shut down following a scandal over phone hacking, owner Rupert Murdoch's son James Murdoch said.

As allegations multiplied that its journalists hacked the voicemails of thousands of people, from child murder victims to the families of Britain's war dead, the tabloid had haemorrhaged advertising, alienated millions of readers, and posed a growing threat to Rupert Murdoch's hopes of buying broadcaster BSkyB.

Yet no-one, least of all the 168-year-old paper's 200 staff, was prepared for the drama of a single sentence that will surely go down as one of the most startling turns in the 80-year-old Australian-born press baron's long and controversial career.

"Having consulted senior colleagues, I have decided that we must take further decisive action with respect to the paper. This Sunday will be the last issue of the News of the World," James Murdoch said in a statement.

He said that if allegations that a private investigator working for the Sunday tabloid hacked the voicemail of a teenage girl who was later found murdered were true, they were "inhuman".

"The News of the World is in the business of holding others to account. But it failed when it came to itself," he added.

"Wrongdoers turned a good newsroom bad and this was not fully understood or adequately pursued."

He added that any advertising space in the final edition would be donated "to causes and charities that wish to expose their good works to our millions of readers".

London's Sky News is reporting that News International chief executive Rebekah Brooks - the tabloid's editor at the time of many of the alleged hacking episodes - offered her resignation last night.

James Murdoch made clear Ms Brooks remained in place as chief executive, saying he was satisfied she knew nothing of the crimes allegedly committed when she was editor.

He said the conviction in 2007 for phone hacking of the paper's royal correspondent Clive Goodman and private investigator Glenn Mulcaire had failed to cure the problem.

"The News of the World and News International failed to get to the bottom of repeated wrongdoing that occurred without conscience or legitimate purpose," he said.

Death blow

The death blow for the tabloid came on Thursday, when veterans' charity the Royal British Legion and a flood of businesses joined a boycott of the newspaper.

The deepening scandal threatened a bid by Rupert Murdoch for control of pay-TV giant BSkyB, while British prime minister David Cameron faced fresh questions over his ties to the Australian-born media baron.

Scotland Yard said up to 4,000 people may have had their voicemails accessed by the News of the World and added that it was probing claims that the paper had paid policemen for information.

The Royal British Legion said it was "shocked to the core" by claims in the Daily Telegraph that an investigator hired by the News of the World may have accessed the voicemails of relatives of dead soldiers.

It said it was dropping the tabloid as a campaign partner as it could not maintain its links with the paper if it had been "preying on families in the lowest depths of their misery".

Earlier this week the paper faced fresh claims that it had accessed the phone and deleted the voicemails of a murdered 13-year-old girl, Milly Dowler, as well as the relatives of two other murdered girls.

Supermarket giant Sainsbury's, mobile phone operator O2, energy supplier Npower and high street stores Dixons, Boots and Specsavers became the latest companies to pull advertising from the paper.

They joined major brands such as Ford, Vauxhall and Mitsubishi, the Halifax bank and Virgin Holidays.

The British government also said it was urgently reviewing its own advertising contracts with the News of the World.

Mr Cameron on Wednesday promised an inquiry into the scandal, including into allegations that police failed to properly investigate the allegations when they were first made several years ago.

But opposition leader Ed Miliband on Thursday urged the prime minister to distance himself from two former editors of the paper during the period covered by the scandal.

Mr Cameron is friends with Ms Brooks, now chief executive of News International, the British newspaper arm of News Corp, while his former communications chief Andy Coulson, another former News of the World editor, quit in January over the claims.

"What we know is that the prime minister does have close relationships with many of the people involved in this - Andy Coulson who worked for him, Rebekah Brooks who is at the centre of some of what has happened," Mr Miliband said.

Cynical move?

Some analysts said Rupert Murdoch would still face pressure to remove Ms Brooks from her position as chief executive of News International. Her editorship of the News of the World a decade ago is at the heart of some of the gravest accusations.

One employee of the doomed paper told Reuters: "We didn't expect it at all. We had no indication. The last week has been tough. None of us have done anything wrong. We thought we were going to weather the storm."

One source at News International said the decision had been taken and acted upon with little delay.

The National Union of Journalists said it was Ms Brooks, not the paper's journalists, who should be fired: "It is the people at the top who need to be punished, not ordinary working journalists," the union said.

And some analysts claimed the move to shut the News of the World would simply pave the way for News International to launch its best-selling daily tabloid The Sun into the weekend market.

The BBC is reporting that two days ago an anonymous person bought and registered the domain name sun.on.sunday.co.uk.

Media commentators say it is a strategy of the Murdoch empire to minimise the fallout from closing its most profitable newspaper.

Former deputy prime minister John Prescott, an outspoken critic of Mr Murdoch's media empire, described the move as a typical management stunt by the Australian-born mogul.

"What he does, he gets rid of problems," Mr Prescott said.

"And in this case nobody in the senior management who are clearly involved in these matters, Rebekah Brooks a clear example, none of those go. But the poor old workers at the News of the World are going, and there's no doubt it will become the Sunday Sun."

- ABC/wires