Newspapers can no longer be trusted to regulate themselves, Guardian reporter Nick Davies told the Leveson inquiry into press standards.

Davies, who with colleague Amelia Hill broke the phone-hacking story that led to the closure of the News of the World in July, said: "I don't think this is an industry that is interested in or capable of self-regulation. The history of the [Press Complaints Commission] undermines the whole concept of self-regulation."

The reporter told Lord Justice Leveson at the high court in London that the PCC's report into the Guardian's phone-hacking revelations two years ago was "terrible".

"Just an awful piece of work. [Guardian editor Alan Rusbridger] said it was worse than useless and that was an understatement," Davies said.

Davies added the report was one of the factors that finally convinced him self-regulation of the press does not work. "You have got a huge intellectual puzzle here," he told Leveson. "How do you regulate a free press? It obviously doesn't work. We're kidding ourselves if we think it would because it hasn't."

Davies added the PCC is designed with the interests of the newspapers in mind. "No system that is designed within that shape is going to succeed and be stable. It has to take account of the victims of the media. That's the crucial first step," he said. "We have to stop only thinking about the freedom of the press and build a satisfactory way for those people to get remedy."

The investigative journalist said apologies should be published as prominently as the articles in which incorrect or damaging information originally appeared.

"If I publish something which falsely damages somebody's reputation, what they deserve is a correction of equal prominence not the PCC's weasel words: 'due prominence'," he said.

Davies also argued that complaints about libel or defamation should be resolved by arbitration without recourse to the courts. "I'd want an arbitration system that's quick. I would put a statutory deadline in," he said.

Newspapers could be required to respond to a complaint within four weeks. He used the example of Kate and Gerry McCann, who took libel action against the Daily Express and Associated Newspapers, to illustrate the advantages of such a system.

"The Daily Express has to put [an apology] on their front page. They don't get damages. I don't think they wanted damages," he said.

He also said he would like to see a statutory body established to advise newspapers on whether stories could be justified in the public interest.

The Daily Star reporter who quit in protest at the newspaper's alleged "anti-Muslim" coverage has told the Leveson inquiry he is taking legal action against an unnamed "person linked to the tabloid world" who he claims threatened him not to speak out about his resignation.

Richard Peppiatt, who worked at the Richard Desmond-owned tabloid for two years, claimed he was targeted after he made public his reasons for resigning in March this year.

"After resigning from the Daily Star I suffered a campaign of harassment and threats to my person, which likely included my phone being hacked," Peppiatt wrote in his witness statement to the inquiry.

"Within hours of the Guardian informing the Daily Star that they were preparing to publish my resignation letter, the threatening phone calls, text messages and emails began.

"They ranged from 'We're doing a kiss and tell on you' and 'Change your voicemail message' to 'You're a marked man until the day you die' and 'RD will get ya' – a reference, I'm certain, to Richard Desmond.

"The harassment became so persistent that I sent my girlfriend to go stay with a friend and called in the police."

The former tabloid journalist said the threats stopped when the Guardian published. Peppiatt said the police had warned the person behind the hate messages, but that he could not reveal who it was.

Outside Organisation, the PR agency that represents Desmond's TV and print businesses, had not returned a request for comment at the time of publication.

• This article was amended on Wednesday 30 November to credit Amelia Hill's role in breaking the phone-hacking story