The scandal rocking Rupert Murdoch's media empire deepened on Thursday with claims that his top-selling British Sunday tabloid hacked in to the phones of relatives of soldiers killed in Iraq and Afghanistan.

The national veterans' association, shocked that News of the World journalists may have been preying on ... families in the lowest depths of their misery, broke off a deal to campaign with the paper for better conditions for service personnel.

Highlighting how the News International title has alienated readers of its flag-waving, populist journalism, the British Legion also said it may join major consumer brands in pulling advertising. After accusations it hacked the phones of not only celebrities and politicians but relatives of missing children and bombing victims, boycott calls have swept the Internet.

The latest twist in a long-running saga that has taken on dramatic new proportions in recent days also threatens to delay a planned multi-billion-dollar takeover by Murdoch's News Corp of news and entertainment broadcaster BSkyB.

And it has raised fresh questions about the power Murdoch wields over the British press, politicians -- including Conservative Prime Minister David Cameron -- and the police.

U.S.-listed shares in News Corp fell over 5 percent at one point on Wednesday, while shares in BSkyB have also eased on fears Murdoch may be blocked or delayed in his bid to buy out the 61 percent of the Pay-TV company he does not already own.

News International said it would work with the Defense Ministry to investigate the report in the Daily Telegraph that the phone numbers of British soldiers were found in the files of a News of the World investigator jailed in 2007 for hacking.

If these allegations are true we are absolutely appalled and horrified, the company said in a statement, echoing language it has used repeatedly as each new case has been brought to light in rival publications. It also noted that it had always been a strong supporter of Britain's armed forces.

The British Legion said: We can't with any conscience campaign alongside News of the World on behalf of armed forces families while it stands accused of preying on these same families in the lowest depths of their misery.

The hacking allegations have shocked us to the core.

CAMERON REACTS

Cameron told a stormy session of parliament on Wednesday that he would order inquiries not only into the newspaper but the wider issue of ethics on Fleet Street -- traditional home of London's cut-throat press. Critics called that a tactic to push the embarrassment of the affair out into a distant future.

Michele Price, a lawyer for the British Legion who works with relatives of soldiers killed in combat, said: I feel that my families would expect inhuman behavior on a remote battlefield but not at the hands of Fleet Street.

Rose Gentle, whose soldier son was killed in Iraq in 2004, told the BBC she was totally disgusted by the allegations: I'd never buy that paper again, if this is true, they need to be brought to justice for this, they need to pay, she said.

Carol Valentine, whose son also died in the armed forces, said the editors of the News of the World should take ultimate responsibility: Anyone who was aware of it or knew it was going on should face criminal charges, she said. If you're the editor of that paper you should have clarified everything

If you haven't done your job properly and verified where it is coming from then you have to take the rap for it.

Murdoch has said he will stand by his most senior British newspaper executive, Rebecca Brooks, who once edited the paper and is a regular guest of the prime minister

Also under fire is Andy Coulson, another link between Cameron and the News of the World. Coulson succeeded Brooks as editor but, having quit over the first hacking case in 2007, went to work as Cameron's spokesman. He resigned from the prime minister's office in January when police reopened inquiries.

WIDESPREAD OUTRAGE

The scandal, which has cast a generally damning light on how newspapers treat the vulnerable, dominated Britain's front pages on Thursday, including Murdoch's Times -- though the News of the World's daily sister paper the Sun devoted all but a paragraph to allegations about the sex life of soccer star Rio Ferdinand.

The phone hacking accusations are that journalists, or hired investigators, took advantage of often limited security on mobile phone voicemail boxes to listen to messages left for celebrities, politicians or people involved in major stories.

The disclosure that the phone hacking involved victims of crime came when it emerged that a private detective working for the paper hacked into voicemail messages left on the phone of a murdered schoolgirl while police were searching for her.

That allegation, and the suggestion it gave hope to the family and police involved in the case, caused outrage and prompted an emergency debate in parliament on Wednesday.

The list of those possibly targeted includes victims of the London suicide bombings of July 7, 2005, and the parents of Madeleine McCann, who disappeared in Portugal in 2007, days before her fourth birthday, prompting a massive search campaign.

Cameron said on Wednesday he was revolted by the allegations but resisted calls to put an end to attempts by Murdoch to buy out BSkyB. The government has already given its backing to the deal and said the two cases are not linked.

Murdoch, the 80-year-old Australian-born American billionaire, kept a low profile at a conference in Sun Valley, Idaho. [ID:nN1E76521X] He did, however, issue a rare statement saying he found the allegations of hacking, and reports that journalists also bought information from police, deplorable and unacceptable. He has appointed News Corp executive Joel Klein to oversee an investigation.

The News of the World's royal correspondent and an investigator were jailed in 2007 for hacking into the phones of royal aides to break a story about Prince William's knee. After campaigning by celebrities and politicians who suspected they too had been spied on, police launched a new inquiry in January.

The News of the World is Britain's best-selling Sunday title, read by 7.5 million people on sales of 2.6 million. Those could be vulnerable if it fails to convince readers that any mistreatment of victims with whom many identify is long past.

Sales of its daily sister the Sun never recovered in Liverpool after it accused the city's football fans of contributing to the 1989 Hillsborough stadium disaster.

Overall, analysts say the scandal is likely to be of only minor and passing discomfort to Murdoch's global media empire, which also includes Fox television, the New York Post and the Wall Street Journal in the United States.

There were signs on Thursday of international ramifications, however. In Murdoch's original home base, Australia, the leader of the Greens party said he wants the government to examine the ramifications on Australia of the phone hacking scandal.

(Editing by Jodie Ginsberg and Alastair Macdonald)

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