Many senior executives at Rupert Murdoch's News of the World knew about phone hacking at the British tabloid, according to a 2007 letter written by a reporter which contradicts James Murdoch's denials and drags Britain's prime minister back into the scandal.

The claims put new pressure on James Murdoch, who runs News Corp's European operations, and further hurt his chances of succeeding his father, Rupert, as chief executive.

In a letter written four years ago in an appeal against his dismissal from the tabloid, former royal reporter Clive Goodman said the practice of hacking was openly discussed until the then-editor Andy Coulson banned any reference to it.

Coulson, who has repeatedly denied all knowledge of the practice, went on to become the official spokesman for Prime Minister David Cameron, a move which took the affair into the political arena and forced the government to turn on Rupert Murdoch after years of courting his favor.

This practice was widely discussed in the daily editorial conference, until explicit reference to it was banned by the Editor, the Goodman letter said, published as part of a parliamentary investigation into hacking. Other members of staff were carrying out the same illegal procedures.

Goodman, who was jailed in 2007 along with private detective Glenn Mulcaire, said he had been told he could keep his job if he agreed not to implicate the newspaper -- but was fired nonetheless after being sentenced to prison.

The committee investigating the hacking scandal said on Tuesday it would probably recall the younger Murdoch to give further evidence after receiving the Goodman letter and statements from other parties which contradicted his previous testimony.

I think it is very likely that we will want to put those points to James Murdoch, said committee head John Whittingdale, adding that it was unlikely to recall Rupert Murdoch.

Tom Watson, the parliamentarian who has most doggedly pursued the scandal, told Sky News it could be months if not years before the full picture of what had happened at the newspaper emerged. If this letter is accurate, the whole foundation of the company's defense collapses, he said.

Allegations of widespread hacking at News Corp's British newspaper arm, and in particular reports that journalists had used investigators to hack in to the voicemails of murder victims, sparked an uproar in Britain that dominated global headlines for almost the whole of July.

It forced the company to close the 168-year-old News of the World, drop its most important acquisition in decades -- the $12 billion purchase of BSkyB -- and accept the resignation of two of its most senior newspaper executives.

Two of Britain's most senior police officers also quit over their failure to properly investigate the scandal and 12 people have been arrested.

The Prime Minister took no action and looked the other way amid these allegations that he had brought someone aware of criminal activity into 10 Downing Street, opposition leader Ed Miliband said in a statement.

Every new bit of evidence shows how catastrophic his judgment was.

Jonathan Tonge, politics professor at Liverpool University, said Cameron's credibility had been damaged at a time when he is striving to fix what he calls Britain's broken society following riots and looting in a string of cities last week.

He's made a lot of worthy pronouncements about wanting to mend a broken society yet he's managed to appoint someone who presided over a paper that operated in the most amoral sense it's possible to conceive of, he said. That doesn't look good.

NO DENIAL

News International, the British newspaper wing of the News Corp media empire, did not deny the accusations made by Goodman.

We recognize the seriousness of materials disclosed to the police and parliament and are committed to working in a constructive and open way with all the relevant authorities, it said in a statement.

The most damaging aspect for James Murdoch within the evidence was the assertion by Tom Crone, the former top legal officer at News International, that he had told Murdoch in 2008 about an email that revealed widespread hacking.

Murdoch has said he did not know about the email when he approved a large payout to English soccer executive Gordon Taylor, who sued the paper -- Britain's most popular Sunday tabloid until its demise -- over phone hacking.

Crone and Colin Myler, editor of the News of the World until it was shut down in July, had already publicly disputed Murdoch's denial, but Crone elaborated on Tuesday, saying they had only made the large payout because of the email.

The email had also been seen by Taylor's lawyers.

Since the 'for Neville' document was the sole reason for settling and, therefore, for the meeting (with James Murdoch), I have no doubt that I informed Mr Murdoch of its existence, of what it was and where it came from, he said.

James Murdoch in his written statement said he had no recollection of the for Neville email. The letter will also make difficult reading for Les Hinton, one of Rupert Murdoch's most senior and loyal executives who quit over the scandal in July.

Though the younger Murdoch had long been seen as a successor to his father, mounting claims of a cover-up could ruin his chances of running the $50 billion media conglomerate. Rupert Murdoch told investors last week he still has full confidence in his son.

The Goodman letter was also sent to Hinton, who appeared just four days later before the select committee and said he had not seen any evidence to suggest the hacking involved anyone else at the newspaper.

The claims and counter claims delivered on Tuesday added to an already-murky picture of who knew what at News Corp.

James Murdoch was not overseeing the newspaper when the alleged offences occurred but he has been accused of trying to bury the extent of the problem.

For Prime Minister Cameron, the damage is by association. He repeatedly defended Coulson after hiring him as his spokesman and denied accusations that the appointment was designed to secure Murdoch's support.

He has said he will apologies if it transpires that Coulson lied over what he knew about hacking.

(Additional reporting by Mohammed Abbas and Michael Holden; and Yinka Adegoke in New York; editing by Rosalind Russell and Matthew Lewis)

Hacking