David Cameron was forced to cut Rupert Murdoch and his newspaper empire loose from the heart of government yesterday as he tried to deflect public anger about his failure to tackle the phone-hacking scandal.

Mr Cameron turned on Mr Murdoch's son James, saying there were questions "that need to be answered" about his role during the phone-hacking cover-up, and criticising him for not accepting the resignation of News International's chief executive Rebekah Brooks.

He also admitted that his desire to win support from the company's newspapers had led him to turn "a blind eye" as evidence grew of widespread illegality at the News of the World.

With a newspaper closed, five arrests and more to follow, 4,000 possible victims, a media empire shaken to its foundations and the Prime Minister reeling, the escalating scandal has become a controversy comparable to the US Watergate saga, with ramifications for Downing Street, the media and police.

Last night the media regulator Ofcom announced it would contact police about the conduct of Mr Murdoch's empire in covering up phone-hacking allegations, to determine whether it was a "fit and proper" owner of the broadcaster BSkyB, which Mr Murdoch is attempting to buy outright. He is due to fly into London today to deal with the crisis, according to reports. Shares in the broadcaster fell by eight per cent.

In a day of further dramatic developments it emerged that:

*Police are investigating allegations that a News International (NI) executive deleted millions of emails from an internal archive, in an apparent attempt to obstruct inquiries into phone hacking.

*Andy Coulson was arrested on suspicion of bribing police officers and conspiracy to phone hack, and Clive Goodman, the NOTW's former royal correspondent, was held in a dawn raid on suspicion of bribing police officers. Both were bailed. A 63-year-old man, thought to be a private investigator, was also arrested in Surrey.

*Mr Cameron's most senior officials were warned before the last election about connections between Mr Coulson and Jonathan Rees, a private investigator paid up to £150,000 a year to illegally trawl for personal information. But Mr Cameron appointed Mr Coulson as his director of communications.

*A judge-led public inquiry will take place to investigate phone hacking. Rupert Murdoch and James Murdoch are prepared to give evidence on phone hacking under oath.

*Ms Brooks was stripped of control of NI's internal investigation and faced calls for her resignation from the Deputy Prime Minister Nick Clegg.

*Wapping sources warned of worse phone-hacking revelations to come.

At a Downing Street press conference, Mr Cameron defended his decision to appoint Mr Coulson but admitted his relationship with senior members of the Murdoch empire had been too close.

"The deeper truth is this... because party leaders were so keen to win the support of newspapers we turned a blind eye to the need to sort this issue, get on top of the bad practices, to change the way our newspapers are regulated," he said. "I want to deal with it."

Mr Cameron said he now thought it was wrong to keep Ms Brooks at the company: "It has been reported that she offered her resignation over this and in this situation, I would have taken it."

Mr Cameron was also asked whether James Murdoch remained a fit and proper person to run a large company, following his admission yesterday that he personally approved out-of-court payments in a way which he now accepted was wrong. The Prime Minister replied: "I read the statement yesterday. I think it raises lots of questions that need to be answered and these processes that are under way are going to have to answer those questions."

Mr Cameron announced two inquires: one to deal with phone hacking and the failure of the police to properly investigate it, and another into press regulation. He said it was clear that the Press Complaints Commission had failed and the second inquiry would bringing forward proposals for an independent body.

Asked what enquiries he had made before employing Andy Coulson, the Prime Minister said: "Obviously I sought assurances, I received assurances. I commissioned a company to do a basic background check."

But the Labour leader, Ed Miliband, said Mr Cameron was still failing to restore confidence in the Government's handling of the scandal: "This is a Prime Minister who clearly still doesn't get it. He is ploughing on regardless on BSkyB. He failed to apologise for the catastrophic mistake of bringing Andy Coulson into the heart of government.

"His wholly unconvincing answers of what he knew and when he knew it about Mr Coulson's activities undermine his ability to lead the change Britain needs."

Asked if Mrs Brooks should consider her position, Mr Clegg told The Independent: "Yes. The whole senior management has to ask how it could have presided over this without appearing to know what was going on. Someone somewhere higher up the food chain needs to be held to account. You can't just ask journalists, secretaries, photographers and low-paid office workers to carry the can for a failure, on James Murdoch's own admission, of corporate governance."

Watergate Parallels