News International's chief executive, Rebekah Brooks, was at a summer garden party thrown by the PR guru Matthew Freud last weekend, where other guests included the BBC creative director, Alan Yentob, the film director Tim Burton, his wife, Helena Bonham-Carter, and the former Daily Mirror editor Piers Morgan.

Brooks was in a buoyant mood, according to one friend and fellow attendee, convinced that her boss, Rupert Murdoch, who is also Freud's father-in-law, would continue to support her, despite the phone-hacking scandal engulfing the company.

It helped that Murdoch had won approval from the culture secretary, Jeremy Hunt, for his bid to take full control of BSkyB days earlier, a prize he had set his eyes on more than a year earlier.

Days later, Brooks was drafting a memo to staff – her second in a week – expressing her horror at the revelation late on Monday afternoon that journalists at the News of the World had ordered a private investigator to hack into the murdered schoolgirl Milly Dowler's mobile phone when Brooks was editor of the paper.

At lunchtime on Tuesday, Brooks emailed employees to say she was "sickened" by the "devastating" claims about Dowler, adding that it was "inconceivable" that she knew the investigator, Glenn Mulcaire, had been asked by journalists at the title to hack into Milly's messages – still less that she had sanctioned their actions.

By then, members of the public had began to phone the News of the World new offices in London to register their disgust at its actions, a small number of people had cancelled subscriptions to the Times and the Sunday Times, the paper's stablemates, and advertisers and readers were being urged to boycott the paper.

Public ambivalence about the plight of many of the politicians and celebrities who had been hacked by the paper turned to revulsion at its treatment of a murdered child and her family.

The atmosphere at News International was described by one senior executive as "subdued". In fact, the organisation was in virtual lockdown.

Political journalists at the group's four papers who are prolific users of Twitter stayed virtually silent throughout Tuesday .

Employees of every rank, from journalists to executives, reached for the same answers when asked about the Dowler revelations, echoing Brooks's words about the shock and surprise they felt when they first learned about them.

There is also friction between the News of the World and the rest of the company as News International starts to distance itself from the behaviour of its Sunday tabloid in the interest of corporate self-preservation.

A Times editorial last night made no mention of Brooks but said that, if the "allegations" about the Dowler hacking were true, "there will not be a journalist in the country who, after the warranted anger, will not feel shamed and depressed."

"There is a lot that is not yet known about this case but this much we do know: this is beyond reprehensible," it added.

There is no doubt the company has been shaken and executives fear more revelations are to come.

On Sunday the News of the World wrote an excoriating leader attacking the "courtroom torture" Milly Dowler's parents were subjected to by lawyers for Levi Bellfield, the man convicted of her murder, during his trial last month.

The very next day, it emerged their own journalists had put the family through a more tortuous ordeal by deleting voicemails left on their daughter's phone in 2002, giving them hope she might still be alive [see footnote].

Milly Dowler and her family were not the only victims of crime to have their phones hacked by Mulcaire. The parents of the two girls killed by Ian Huntley, Holly Wells and Jessica Chapman, have already been warned by Scotland Yard that they are likely to have been targeted and there may be more.

Brooks's survival may depend on how many of them are informed in the coming weeks that they appear in Mulcaire's notes.

Brooks also reacted in her emailon Tuesday to calls for her to consider her position, including one from the Labour leader, Ed Miliband, by stating "she was determined to lead" the company through a difficult period.

Such defiance reflects repeated private assurances from Murdoch that Brooks will continue to receive his full backing.

Murdoch's view is that the News of the World's enemies are motivated by personal animus against him and that Brooks can weather the storm.

Senior executives at News International have been saying privately that many senior journalists or executives could pay the price for the hacking scandal, but Brooks won't be one of them. "Anyone but Rebekah," has become their mantra.

Brooks was at another social event last Thursday, a summer party thrown by BSkyB at the Foreign Office in Whitehall, flanked by Rupert's son and heir apparent, James Murdoch. The two are said to be close and their professional relationship is bolstered by social ties. Brooks and her husband often dine with the younger Murdoch.

But there is speculation that Brooks may not survive if Rupert Murdoch retires or steps back from the company and James take the reins.

An industry source who is close to the company said that if the parents of Milly Dowler sue, as their lawyer, Mark Lewis, has said they will, it could be nine months before their case is heard. That is a long time for the public to be exposed to headlines about Dowler's hacking.

• The following was published on 12 December 2011 in the corrections and clarifications column: An article about the investigation into the abduction and death of Milly Dowler (News of the World hacked Milly Dowler's phone during police hunt, 5 July, page 1) stated that voicemail "messages were deleted by [NoW] journalists in the first few days after Milly's disappearance in order to free up space for more messages. As a result friends and relatives of Milly concluded wrongly that she might still be alive." Since this story was published new evidence – as reported in the Guardian of 10 December – has led the Metropolitan police to believe that this was unlikely to have been correct and that while the News of the World hacked Milly Dowler's phone the newspaper is unlikely to have been responsible for the deletion of a set of voicemails from the phone that caused her parents to have false hopes that she was alive, according to a Metropolitan police statement made to the Leveson inquiry on 12 December.