The former editor of News of the World, Andy Coulson, has been granted bail in London as police confirm they have made a third arrest in the hacking scandal which has brought down News Corporation's biggest tabloid.

The 168-year-old News of the World will publish its last edition on Sunday amid allegations it hacked the phones of murder victims and dead soldiers' families, and made corrupt payments to police.

Police yesterday arrested Mr Coulson, who is ex-media chief to Britain's prime minister David Cameron, along with the paper's former royal editor Clive Goodman, who had previously been jailed for hacking the voicemails of Prince William and Prince Harry.

A third man, aged 63, was also arrested late on Friday at a Surrey address in connection with corruption allegations.

The corruption claims refer to alleged improper payments to police officers by the News of the World when Mr Coulson edited it from 2003 to 2007.

After nine hours of questioning overnight, 43-year-old Mr Coulson was released on bail until October, telling reporters as he left: "There is an awful lot I would like to say, but I can't at this time."

As the crisis deepens there are reports that News Corp's chief Rupert Murdoch will jet into London on Saturday (local time).

News Corporation has not commented on 80-year-old Mr Murdoch's agenda in London, but it is thought he will be keen to try and save his company's bid for control of the satellite broadcaster BSkyB, which is looking in doubt as the scandal deepens.

The Guardian newspaper is now also reporting an executive from News International - News Corp's UK wing - has deleted four or five years worth of emails between staff and their bosses.

'All in this together'

The scandal has forced the prime minister to confront the allegations and his relationship with Mr Coulson and he has promised two urgent inquiries into the claims of hacking and corruption.

As Mr Coulson was arrested, Mr Cameron looked rattled as he held a press conference defending his decision to hire Mr Coulson.

He admitted the scandal went to the heart of the British establishment, saying: "The truth is, we have all been in this together - the press, politicians and leaders of all parties, and yes, that includes me."

Mr Cameron said he gave Mr Coulson a "second chance" after he quit the News of the World in 2007 when two people were jailed over voicemail hacking.

Mr Coulson then quit as his communications chief in January, saying the continuing claims were distracting him from his job.

"The decision to hire him was mine and mine alone, and I take full responsibility for it," Mr Cameron said, adding however that Mr Coulson "became a friend and is a friend".

Mr Cameron announced a judge-led public inquiry into the furore, as well as a second inquiry into the way in which the British press is regulated.

"These are the questions that need answering: Why did the first police investigation fail so abysmally? What exactly was going on at the News of the World? And what was going on at other newspapers?" he said.

Brooks secretly recorded

The shock closure of the paper has been seen as a way of protecting Rebekah Brooks, the head of News International, who was editor of the News of the World for three years before Mr Coulson.

She reportedly offered her resignation but was rebuffed. Upon hearing this Mr Cameron told reporters: "In this situation, I would have taken it."

Deputy prime minister Nick Clegg added: "Someone higher up the chain has to take responsibility."

However, in a meeting with angry staff on Friday, which was secretly recorded, Ms Brooks said her resignation would not have ended the scandal, noting that advertisers had pulled out in their droves from next weekend's edition.

She insisted she knew nothing of the hacking, saying: "If being betrayed is a resignation issue, well maybe I've just read it wrong, but I think I'm much more useful leading this company through this."

Ms Brooks was confronted by angry staff in the meeting, who accused her of having made the 168-year-old newspaper "toxic".

"This is not exactly the best time in my life but I'm determined to get vindication for this paper and for people like you," she said.

An angry employee told Ms Brooks: "Can't you see that by your actions yesterday, you're calling our newspaper toxic, we have all been contaminated by that toxicity, by the way we've been treated?".

She responded that it was a "very bad moment" but said she believed that in a year's time, after the police investigation, staff would understand.

"You think I should have resigned because we'd never have to close the News of the World. It's just not true," she said.

Ms Brooks said it was "too soon" to discuss whether the group would open another Sunday newspaper.

"Yes, we're in a very bad moment but we will continue to invest in journalism," she added.

She also spoke to staff about having been a victim of phone hacking, saying police had told her in 2006 that she was one of the most frequent targets of private investigator Glenn Mulcaire, who was jailed for the practice in 2007.

The last edition of the unashamedly sensationalist tabloid will be on Sunday, ending a long history of publishing sex scandals but also hard-hitting investigations including into recent Pakistani cricket match-fixing claims.

Ms Brooks said no decision yet had been taken on replacing the paper, reportedly with a Sunday edition of its stablemate, the daily Sun, Britain's biggest selling newspaper.

- AFP