Rupert Murdoch will shut down Britain's biggest selling Sunday newspaper, the News of the World, in a startling response to a scandal engulfing his media empire.

As allegations multiplied that its journalists hacked the voicemails of thousands of people, from child murder victims to the families of Britain's war dead, the tabloid hemorrhaged advertising, alienated millions of readers and posed a growing threat to Murdoch's hopes of buying broadcaster BSkyB (BSY.L).

The announcement, one of the most dramatic in the 80-year-old press baron's controversial career, is widely seen as an effort to prevent the crisis from spreading beyond the News of the World to more lucrative parts of Murdoch's empire.

The scandal has also become a huge embarrassment for British Prime Minister David Cameron because of his close ties to some of the figures at the center of the controversy.

Murdoch's son James, who chairs the British newspaper arm of News Corp (NWSA.O), said News of the World has been "sullied by behavior that was wrong."

"Indeed, if recent allegations are true, it was inhuman and has no place in our company," he said in a statement. "The News of the World is in the business of holding others to account. But it failed when it came to itself."

He praised the News of the World for "a proud history of fighting crime, exposing wrong-doing" and setting the nation's news agenda. But he said the paper, which his father bought in 1969, was unviable because of the scandal.

The announcement that the paper's final issue will be on Sunday, July 10 may even be a signal that the famously excessive practices of British tabloid journalism will be less prevalent in the future.

The news came as a complete shock to its 200 staff.

There were gasps and sobbing as they were told of the closure of the 168-year-old title, which from its earliest days in the Victorian era sought to titillate the British working class with sensational journalism about sex and crime.

The profits of the final edition of the News of the World, which was acquired by the Australian-born Murdoch back in 1969 in his first foray into Fleet Street, will go to charity.

"No one had any inkling at all that this was going to happen," said Jules Stenson, features editor of News of the World.

On the surface, it seems like a bold gamble to sacrifice a historic title that had helped establish Murdoch in a British newspaper industry that he has dominated in recent decades.

The closure doesn't mean that Murdoch's problems from the scandal are over. Growing popular and political anger over the phone hacking saga had spurred concerns that there could be snags in securing government approval for News Corp's $14 billion bid for BSkyB, of which it already owns 39 percent.

Stephen Adams, a fund manager at Aegon Asset Management, which is one of the biggest shareholders in BSkyB, told Reuters he saw News Corp's move as aimed at restoring or remedying a tarnished reputation.

"But we also critically see it as a reflection of News Corp's desire to progress the BSkyB bid and have full ownership of the company," he said.

Cameron's right-of-center government had already given an informal blessing to the takeover, despite criticism on the left that it gave Murdoch too much media power.

While the costs of closing the News of the World will be modest, investors and analysts are still concerned about the wider implications of the saga. News Corp's U.S. shares fell more than 5 percent on Wednesday, and edged 0.23 percent lower on Thursday in a rising overall market.

"I don't see how this (BSkyB) deal can go ahead. It's politically totally unacceptable now," said Alex Degroote, media analyst at Panmure Gordon. "To me, it's an explicit admission of culpability."

Still, others said that any attempt to block the BSkyB deal at this late stage would likely spark a legal challenge from News Corp, and one the company would likely win. A delay is likely, "but they can't delay it forever so barring some major development this deal is going to get agreed," said media consultant Steve Hewlett.

The outrage targeted at the News of the World has turned attention on Cameron's own links to the paper, and in particular his friendship with Murdoch's close confidante and head of his British newspaper arm Rebekah Brooks.

Murdoch still faces pressure to remove Brooks, a friend of Cameron's. Her editorship of the News of the World a decade ago is at the heart of some of the gravest accusations.

Cameron has already been hit by the scandal: he chose former News of the World editor Andy Coulson as his communications director, even though Coulson was caught up in the hacking scandal. One of his reporters and a private investigator had been convicted of hacking into phones of members of the royal family, although Coulson insisted he knew nothing about the phone hacking.

As new allegations surfaced, Coulson had to resign from Cameron's team earlier this year. The Guardian newspaper reported on Thursday that Coulson would be arrested on Friday. Police declined to comment. Kate Holton and Georgina Prodhan Reuters