Armed forces charity ditches newspaper as campaigning partner, saying it was 'shocked to the core' by hacking claims

Families of members of the armed forces killed in Afghanistan and Iraq have expressed disgust at the revelation they were targeted by Glenn Mulcaire, a private investigator who worked for the News of the World.

The latest disclosures prompted the Royal British Legion to drop the newspaper as its campaigning partner, saying it had been "shocked to the core" by the claims. The servicemen and women's charity said it had suspended all relations with the News of the World and was reviewing its advertising budget with News International, which also publishes the Sun and the Times.

The media group is at the centre of a huge political storm following days of shocking revelations about phone hacking, including news that the paper intercepted voicemails left on a phone belonging to the murdered schoolgirl Milly Dowler and targeted the phones of families of the victims of the 7/7 attacks.

The latest allegations were "very distressing", the stepfather of a British soldier who was killed in Iraq told BBC Breakfast. Jim Gill, stepfather of Second Lieutenant Richard Shearer of the 1st Battalion, Staffordshire Regiment, who was killed in Iraq in July 2005 by a roadside bomb, said his family had suspected their phone was being hacked but they had not yet been contacted by police.

"It is very distressing. The terrible thing is that we're not surprised by it," he said. "It is distressing for all the people who have been hacked, especially the people who are going through grief. We thought the phones may be being listened to but we did not think it was the press."

MPH Solicitors, whose clients include Samantha Roberts, the widow of Sergeant Steven Roberts of the 2nd Royal Tank Regiment, said it had been contacted on Wednesday by a newspaper and told Roberts's phone may have been hacked, along with a mobile belonging to her lawyer, Geraldine McCool.

McCool said there was no evidence to show confidential information was obtained through hacking.

"Whilst this developing story continues to shock and concern I confirm that I have never seen a news article that gave rise to concern that information had been obtained through illegal phone hacking," she said.

"I sincerely hope that any future revelations do not involve our clients and that full disclosure of the extent of this diabolical practice is now made."

Rose Gentle, whose son, Fusilier Gordon Gentle, was killed in Iraq in 2004, called for an immediate inquiry and said the hacking of phones belonging to relatives of dead soldiers would be "pretty disgusting" if true.

"It's like a living nightmare, just waiting for a knock at the door again to be told some bad news," she told Radio 4's Today programme.

She said she wanted the alleged perpetrators to be brought to justice. "The people responsible should be held up and stand up in court."

Ed Miliband, the leader of the opposition, said he was disgusted by allegations that the families of dead soldiers had been hacked. "If true, they represent a gross and shocking betrayal of our heroic service people and their loved ones," he said.

"It is grotesque beyond belief that these actions are alleged to have been committed on behalf of a news organisation committed to the military covenant. It reinforces the need for the police to do their work and for a public inquiry to be swiftly established so that justice can be done and the truth established."

The impact of the scandal has continued to hit Rupert Murdoch's news empire. Shares in BSkyB fell by 2.5% when trading began in London on Thursday, dropping 21p to 806p, as pressure grew on the culture secretary, Jeremy Hunt, to delay News Corporation's takeover of the broadcaster.

BSkyB shares had been changing hands for 850p on Monday, but have fallen steadily since the Guardian reported that Milly Dowler's phone had been hacked by News of the World journalists. Before this week, BSkyB investors had hoped to force Murdoch to pay as much as £11 per share to gain control of the 61% of the company he does not already own.

News Corporation's own shares have also suffered, falling by 3.6% in New York on Wednesday.

Divisions have emerged between David Cameron and Nick Clegg over the handling of the controversy. The prime minister and his deputy appeared to disagree over the level of inquiry that should be held into illegal phone hacking and wider questions about the future of media regulation.

The prime minister bowed to pressure to hold at least one inquiry but is resisting calls from Clegg for a judge to take charge.

The cabinet minister Chris Huhne insisted it was "absolutely crucial" that the inquiry into the relationship between police and the media was led by a judge.

"I think the inquiries have got to be independent," he told BBC Radio 4's Today programme. "They have got to be able to access all the information and call witnesses and I think that inevitably means with the harder-edged bit – in other words, the relationship between the police and the media – it is going to have to be judge-led, because frankly the judge has got to be able to rely on evidence given under oath."

Asked whether Rebekah Brooks, News International's chief executive, should resign, he said it was up to News International, but added: "Either they know what's going on, in which case the editor of the News of the World was complicit in some criminal activity, or they were extremely incompetent."

The government faced calls from across the Commons as well as from City shareholders to delay its final decision on the proposed takeover of BSkyB by News Corporation, parent company of the News of the World.

Hunt gave the provisional go-ahead for the deal last Friday, subject to a final seven-day consultation over plans to hive off Sky News as a separately listed company to allay plurality fears. He is due to consider thousands of pages of documents submitted during the consultation. He will then make a decision, which could be delayed into the summer recess, after consultations with Ofcom and the OFT.

The Labour leader took the momentous step of turning against Rupert Murdoch's empire, calling for the resignation of Brooks and demanding the BSkyB decision be referred to the Competition Commission.

"The public will react with disbelief if next week the decision is taken to go ahead with this deal at a time when News International is subject to a major criminal investigation and we do not yet know who charges will be laid against," he said.

Simon Hughes, the Liberal Democrat deputy leader, said he would ask Ofcom to exercise its right to assess whether the directors of News Corp were "fit and proper" to take full control of BSkyB.

"Ofcom … has a statutory obligation to consider at any time who is appropriate to hold a broadcasting licence," he said. "The message from this house must be that we want it actively to consider that obligation.

"If it comes to the view that the future owners of BSkyB are inappropriate, it should rule accordingly, which would mean that the BSkyB merger could not go ahead." Tom Watson, a former Labour minister, said in Wednesday's Commons debate that James Murdoch, the tycoon's son, had "personally, without board approval, authorised money to be paid by his company to silence people who had been hacked and to cover up criminal behaviour within his organisation".

Procter & Gamble, Britain's biggest advertiser, together with O2, Vauxhall, Butlins and Virgin Holidays, joined Ford in pulling advertisements from this weekend's News of the World. P&G spent almost £1.5m in the newspaper in the last year.