Sky News was today facing its first credibility crisis after it admitted it had carried a fake news report at the height of the Iraq war and accepted the resignation of the reporter responsible.

The broadcaster said the report was "unacceptable" and it was paramount Sky News maintained its "proud reputation for accuracy and integrity".

James Forlong, 40, handed in his notice after an urgent investigation by senior Sky executives found his report purporting to show a cruise missile launch from HMS Splendid in the Gulf in March was bogus.

In an embarrassing admission, Sky News bosses had to admit some of the scenes were in fact reconstructions or taken from library footage.

Forlong's producer, Lucy Chaytor, who was also implicated in the row, was cleared of any blame.

"The report gave the impression that HMS Splendid was engaged in action against Iraq, when, in fact, some of the scenes were reconstructions, or from library footage," said Mark Sharman, the deputy managing director of Sky Networks, who chaired the inquiry.

"We failed to make the distinction. This is unacceptable to a news operation, which has built a proud reputation for accuracy and integrity. Maintaining that reputation is paramount," he added.

Forlong and Chaytor were suspended two days ago when the accusations were first levelled at the network by a BBC documentary crew that was filming on the HMS Splendid at the same time.

Forlong, a veteran Sky News correspondent said: "It was, in ten years of unblemished service with the company, a single lapse of judgment which is a source of deep regret.

"There was never any conscious intent to deceive viewers, though I accept that was the outcome.

"I accept the damage this has done to my integrity; something that has never before been called into question during a decade of working as a correspondent for Sky News in some of the most difficult and dangerous reporting environments in the world."

The head of Sky News, Nick Pollard, said he was pleased the issue had been cleared up quickly.

"Sky News' reputation for honest and trustworthy journalism is its most important asset and we have established that reputation very successfully over the past 14 years," he said.

"I believe James has taken the only possible course in view of the events that have come to light."

Mr Sharman said it was "unacceptable" Forlong's report had failed to make clear to viewers that what they were seeing was a reconstruction, rather than actual footage of HMS Splendid engaged in action against Iraq.

Forlong and Chaytor were suspended yesterday after the BBC documentary crew claimed to have proof the Sky News report was faked.

The accusation will be repeated in a BBC2 documentary, Fighting the War, to be shown on Sunday.

Forlong, who was in St Petersburg covering a visit by Prince Charles this week, came back yesterday to face the music.

Sources say he "stonewalled" and "listened" to the charges laid before him at a disciplinary hearing. Today he decided he had no option but to resign.

Sky News has moved swiftly to bring a end to the affair - it has taken just two days to come to a conclusion - and it will be relieved the fake TV story will not be prominent in tomorrow's papers because of coverage of the events surrounding the disappearance of alleged MoD mole, Dr David Kelly.

"Five or six years ago this may have had a different effect. But we have built up a robust reputation and the removal of one bad apple from the barrel shows we don't want that reputation contaminated in any way," said one insider.

The Sky chief executive, Tony Ball, was said to be deeply concerned about the potentially disastrous consequences for the channel's public image and ordered a swift and clean end to the investigation.

However, journalists say the episode has cast a pall of gloom over Sky's newsroom.

"This is not good news. There was a feeling here that Sky News have had a really good year; that we had a good war, now it will be difficult to see how we can look back without this always being a footnote in our coverage. Will we be able to enter for the Baftas or RTS news awards next year, for instance?" said one insider.

But there is also anger about the way the BBC handled its discovery. The first Sky News knew of the allegations was when it took a call from the Guardian on Wednesday.

ITV had carried the faked report, which was "pooled" under Ministry of Defence war reporting arrangements, and was also kept in the dark.

After 12 years in which Sky News has sought to build up trust in the face of scepticism from the industry and the public, staff fear the danger of becoming tarnished with poor journalistic practices.

Sky News is proud of its news channel of the year award from the Royal Television Society - such accolades have been hard won, particularly given the attitudes of those who are suspicious of the channel's major shareholder, Rupert Murdoch.

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