Hedge funds have suffered one of their worst setbacks in years, losing tens of millions of pounds by betting that Rupert Murdoch's News Corporation was on the verge of taking full control of BSkyB.

Short-term speculators expected to make a killing by investing in a company viewed as a prime bid target, but instead have seen shares in the satellite television company plunge.

One trader said: "It's a bloodbath out there. The hedgies have dumped their holdings and some of them will be nursing big losses."

With News Corp today bowing to political pressure by abandoning its plan to take full control of BSkyB, more selling is possible in the days ahead. Brokers estimate another 100m BSkyB shares are in the hands of "arbs," funds that specialise in opportunities presented by mergers and acquisitions.

But BSkyB's share price steadied on Wednesday after the announcement that the bid was off because investors were relieved there was now clarity about the future. By 3.30pm, shares were just 2p lower on the day at 690p, after initially falling sharply. Some shareholders bought the stock on hopes BSkyB could announce a £4bn special dividend when it publishes full-year results in two weeks' time.

But over the last 10 days, the company has seen its market value cut by about £3bn with the shares falling from 850p to below 700p.

The biggest shareholders in BSkyB are institutions such as Capital Research & Management, BlackRock and Fidelity. But hedge fund Perry Capital owns a stake of 1.1% and could be sitting on paper losses that run into millions if it acquired the stock at above current levels.

Several big American hedge funds have reduced their positions in BSkyB, according to regulatory filings. Taconic Capital Advisors and Davidson Kempner European Partners LLP have been net sellers. Taconic has taken its stake down to 1.45%, while Davidson Kempner is left with 0.79%.

The British hedge fund millionaire Crispin Odey, who was once married to Rupert Murdoch's eldest daughter Prudence, sold some of his 2.4% holding last week, but has topped it up again. However, the continuing decline in BSkyB's share price means Odey's paper loss is estimated to exceed £3m.

A spokesman for Odey said the group had owned BSkyB stock for about 10 years, and described the share price fall as "nothing. It was 550p a year ago."

Hedge funds had expected their investments to rise in value, because they anticipated News Corp's bid for the 61% of BSkyB it does not already own would be cleared by ministers.

But News Corp scrapped the deal ahead of a parliamentary motion calling on Murdoch to do exactly that, following the phone-hacking scandal that has engulfed his British newspaper business.

Speculators have also got their fingers burnt by News Corp, listed in the US, with the shares down over 10% since the scandal broke. The family speaks for about 40% of the voting shares in the Murdoch-run company.

But Murdoch has received support from Donald Yacktman, chief investment officer of Yacktman Asset Management, the ninth-biggest shareholder. He told Reuters: "News Corp may really tank businesswise, but I wouldn't put a high probability on it."

He said BSkyB was not a make-or-break deal for News Corp, which generates most of its income from cable television and entertainment. "It does slightly reduce the predictability of cash flows, but the impact is minimal at best."

This week Saudi prince Alwaleed bin Talal al-Saud, owner of 7% of Murdoch's company, said: "My confidence in News Corp, in Rupert Murdoch and James Murdoch is unshaken completely. We will sell nothing. We are standing by our friends."