Sky News admitted on Thursday that its reporters hacked emails on two separate occasions, insisting that it was done in the public interest. But legal experts said that's no defense, the police are investigating, and Mr Murdoch's goal of taking full control of Sky News' profitable parent company, British Sky Broadcasting (BSkyB) Group PLC, may be at risk.
"It seems less likely, and it may not be in their best interest," said Michael J Mannor, an assistant professor of business strategy at the University of Notre Dame. "News Corp. is under a lot of pressure in a lot of different ways... It's important for a news media organization to have the trust of the public, and that's been a big struggle."
Shares in BSkyB fell 5 per cent following the revelations but recovered somewhat in late afternoon trading, closing down about 2.4 per cent at 642.5 pence ($10.16).
Sky Chief John Ryley said in a statement released on Thursday that his reporters had twice been authorized to hack into computers for stories. That included in the case of Anne and John Darwin, the so-called "canoe couple" who became notorious in Britain after the husband faked his own death in a boating accident as part of an elaborate insurance scam.
Mr Ryley acknowledged that his organization had intercepted the couple's emails, but said the material was later handed to police and insisted Sky had done nothing wrong.
"We stand by these actions as editorially justified and in the public interest," he said. "We do not take such decisions lightly or frequently."
Mr Ryley was quick to point out other instances where journalists had pushed the limits, noting that in a 2004 investigation, a Sky News journalist had bought an Uzi sub machine gun to illustrate the availability of banned weapons in Britain. In 2003, a reporter sneaked into a restricted area at London's Heathrow Airport to highlight security failings, he said.
But the company's public interest defense for computer hacking drew immediate skepticism from British legal experts.
David Allen Green, media lawyer at Preiskel & Co, said there is no such thing as a public interest defense as far as Britain's Computer Misuse Act is concerned. However, he noted that Britain's Crown Prosecution Service can rule that filing charges wouldn't serve the public interest.
"As Sky News took the hacked emails to the police themselves, it appears that any prosecution was decided not to be in public interest," he said in a message posted to Twitter.
That may change. British police said on Thursday they were investigating the circumstances surrounding Sky's email hack, which was first reported by Britain's Guardian newspaper.
That could mean a further headache for News Corp, which has seen its moves to increase its 39.1 per cent stake in BSkyB scuppered by a string of ethics scandals.
Mr Murdoch's media empire - whose holdings include Sky News' sister channel Fox News and The Wall Street Journal - has spent the better part of a year in the spotlight over widespread illegal behavior at the now-defunct News of the World tabloid, where journalists routinely hacked into public figures' phones in an effort to win scoops.
The scandal boiled over after it was shown that the tabloid hacked into the phone of murdered schoolgirl Milly Dowler, whose 2002 disappearance dominated British headlines. Since then a host of Mr Murdoch companies have come under the microscope for allegedly shady dealings.
Media commentator Paul Connew said that while the British public may shrug off the latest hacking revelation, "the timing of this is clearly less than ideal from a Sky point of view."
The news came the same day that Sky News managing editor Simon Cole - who authorized the hacking - announced his retirement, although on Twitter he insisted that the move was unrelated to the controversy.
"There is no linkage," he wrote on the microblogging site "Fact."
The news also follows the resignation of Mr Murdoch's son James from his title of chairman of BSkyB. The younger Murdoch said he was stepping down in a bid to insulate the broadcaster from the controversy, prompting one opposition lawmaker, Chris Bryant, to ask on Thursday whether James had jumped ship to avoid being tarred by the latest scandal involving the Darwins' emails.
BSkyB said that James Murdoch's resignation was "totally unrelated to the Darwin story."
In separate developments, a person close to the case said that News of the World publisher News International was challenging celebrity phone hacking victim Sienna Miller over the size of her legal bill, and the London Wasps Rugby Club confirmed that its owner, Steve Hayes, had been arrested in connection with the police investigation into email hacking.
Miller won 100,000 pounds (about $160,000) from News International last year after the company admitted eavesdropping on her phone messages, but a person close to the case says there's been no agreement how much to pay out in legal costs and that the issue is headed to court. He spoke anonymously because the information wasn't cleared for release.
News International spokeswoman Daisy Dunlop declined comment, as did Miller's lawyer, Mark Thomson.
Hayes' arrest, first reported in London's Evening Standard, results from Scotland Yard's Operation Tuletta, which was established to investigate computer hacking by journalists.
In a sign that the scope of the investigation may be broadening, police have said his arrest wasn't directly related to newspapers.
Hayes is currently out on bail.