Rupert Murdoch's grip on his media empire was dramatically challenged yesterday after his company was labelled a "toxic shadow state" which launched a dirty tricks campaign against MPs and now faces a salvo of phone-hacking claims in the United States.

On a tumultuous day for the media mogul, the lawyer who brought the first damages claims against the News of the World in Britain said he had uncovered new allegations of the use of "dark arts" by News Corp in America and was ready to file at least three phone-hacking lawsuits in the company's backyard.

The sense of a legal net tightening around Mr Murdoch and News Corp was heightened by the announcement that he and his son James will testify separately next week before the Leveson Inquiry into press standards during three days of what is likely to be uncomfortable scrutiny of alleged widespread criminality in their British tabloid newspapers.

In a separate development, the royal editor of The Sun became the latest journalist on the paper to be arrested on suspicion of making corrupt payments to public officials.

The arrest coincided with the publication of an incendiary book on the scandal which levelled new accusations that the NOTW set out on an extraordinary campaign of intimidation of MPs to try to blunt their investigations into its alleged law breaking.

Last night senior MPs called for News International (NI) to be investigated by the Commons for potential contempt of Parliament over the claims that members of the House of Commons Culture, Media and Sport Select Committee were targeted by attempts to dig dirt on their private lives. Dial M for Murdoch, written by the Labour MP Tom Watson and The Independent's Martin Hickman, also alleges that:

- Rebekah Brooks, the former chief executive of NI, was bugged in her own office shortly before she resigned last summer over the phone hacking of Milly Dowler, the murdered schoolgirl.

- On his release from prison, Glenn Mulcaire, the convicted NOTW hacker, allegedly was contracted to give security advice to a private security company, Quest, whose chairman is Lord Stevens, a former Commissioner of the Metropolitan Police.

- NI intermediaries approached Mr Watson with a "deal" to "give him" former NOTW editor and Downing Street press chief Andy Coulson but that Ms Brooks was "sacred".

NI, which runs Mr Murdoch's British newspapers, said it had no comment to make on the book.

At a packed Westminster press conference, Mr Watson, who is a member of the Culture, Media and Sport committee, said the claim that the NOTW set out in 2009 to undermine the MPs investigating it came from Neville Thurlbeck, the NOTW's former chief reporter.

In the book, Mr Thurlbeck, who has been arrested in connection with phone hacking, says: "An edict came down... and it was find out every single thing you can about every single member: who was gay, who had affairs, anything we can use." Mr Thurlbeck told The Independent last night that the order to target the MPs, which involved assigning two politicians each to a group of six reporters, had not originated from inside the paper but instead came from "elsewhere inside News International". He insisted that NOTW staff had been reluctant and there was a "degree of procrastination" before the plan was "suddenly and unexpectedly halted about 10 days later".

Mr Watson, who has received an apology from NI after he was placed under surveillance, said he believed the campaign was nonetheless successful and had contributed to a decision by the media committee not to demand that Ms Brooks give evidence to it in 2010.

He added: "Parliament was, in effect, intimidated. News International thought they could do this, that they could get away with it, that no one could touch them; and they actually did it, and it worked."

Labelling News Corp a "toxic institution", he added: "We conclude that the web of influence which News Corporation spun in Britain, which effectively bent politicians, police and many others in public life to its will, amounted to a shadow state."

Former Plaid Cymru MP Adam Price, who is gay and was a member of the DCMS committee, is described in the book as having been warned by a Conservative colleague that their private lives would be raked over if they called Ms Brooks to give evidence - "effectively they would delve into our personal lives in order to punish us".

Hours after publication of the book, Mark Lewis, the lawyer who has doggedly pursued hacking claims, told a press conference in New York that he was investigating allegations of impropriety at Mr Murdoch's US media companies, including Fox News. He said a high-profile trip to America to prepare claims on behalf of victims whose phones were allegedly hacked on US soil had generated a slew of new allegations about wider use of "dark arts" to obtain private information.

He said: "The investigation in the UK began with one claim by one client and look where it is now. While it starts in America with three cases, it seems likely it might end up with more."

The allegations will provide an awkward backdrop for the Murdochs to their appearances before the Leveson Inquiry. Rupert Murdoch, who is the first witness before the inquiry to be scheduled for two days of testimony, will be questioned about practices in his British newspapers and whether he had knowledge of those activities.

Chris Bryant last night confirmed that he would be asking Parliament to investigate the claims that NI carried out targeted intimidation.

Royal editor of The Sun arrested

The royal editor of The Sun was arrested yesterday after News Corp handed over information to detectives investigating alleged illegal payments to public officials.

Duncan Larcombe, 36, who had previously worked as the newspaper's defence editor, was arrested during an early morning raid at his home in Kent on suspicion of conspiracy to corrupt and conspiracy to cause misconduct in a public office.

Officers from Scotland Yard's Operation Elveden also arrested a 42-year-old former member of the armed forces and a woman, 38, at their home in Lancashire. All three were later released on bail.

Mr Larcombe was the paper's royal correspondent from 2005 to 2009 before being appointed defence editor for 14 months. He returned to the royal beat last year and led the newspaper's coverage of the wedding of Kate Middleton and Prince William. He was the second Sun defence editor to be arrested during the police inquiry.

Hacking Scandal - The Net Tightens On The Murdochs

meanwhile .....

Few people have done so much to force the News International phone hacking scandal into the public eye as Tom Watson, the Labour MP. Here, in exclusive extracts from a sensational new book (written with The Independent's Martin Hickman), he reveals how he and other members of the Commons select committee were targeted by a media empire that, he claims, ruthlessly discouraged unwelcome attention

Watson told yesterday's launch of Dial M for Murdoch that the News of the World's former chief reporter, Neville Thurlbeck, had "targeted" MPs who were investigating News International's activities. The tale begins in July 2009...

Unbeknown to members of the Culture Committee, the NOTW established a team to investigate their private lives. For several days, as chief reporter Neville Thurlbeck would later tell Tom Watson, reporters searched for any secret lovers or extra-marital affairs that could be used as leverage against the MPs.

Thurlbeck said: "All I know is that, when the DCMS [Department of Culture, Media and Sport Select Committee] was formed or rather when it got onto all the hacking stuff, there was an edict came down from the editor and it was find out every single thing you can about every single member: who was gay, who had affairs, anything we can use.

"Each reporter was given two members and there were six reporters that went on for around 10 days. I don't know who looked at you. It fell by the wayside; I think even Ian Edmondson [the news editor] realised there was something quite horrible about doing this."

Separately, a NOTW figure tasked with talking to Watson and other committee members to glean their question plan let them know that Rebekah Brooks believed Watson and [fellow MP Paul Farrelly] were the inquiry's "ringleaders". Watson was privately told by Downing Street insiders that Wapping was using its connections to persuade senior politicians to urge him to hold back.

Gordon Brown called Watson to tell him that Rupert Murdoch had phoned Tony Blair to tell him to call Watson off.

The book claims that Mr Blair has denied this, with Gordon Brown saying he cannot remember the phone call to Watson. Mr Blair's spin doctor Alastair Campbell remembered intimidation, however...

Speaking three years later, Alastair Campbell, Tony Blair's former communications director, recalled the "bullying culture": "I recall Rebekah Wade telling me that so far as she was concerned, with Tom Watson it's personal, and we won't stop till we get him...."

As the committee continued its work, News International had another assignment for a surveillance expert who had worked for the NOTW since 2003, Derek Webb, whose firm was called Silent Shadow.

The former policeman had legally watched dozens of pop stars, footballers and royals. In 2005 he had followed Angelina Jolie, Delia Smith, Gordon Ramsay and the Home Secretary, Charles Clarke (whose responsibilities included the police); in 2006 George Michael and the comedian Rik Mayall; and in 2007, the Duke of Westminster. Typically, his work would involve tailing a target for five days and noting down where they had gone and who they had met.

From 28 September until 2 October 2009, at the last Labour Party conference before the general election, Webb was ordered to follow the every move of Tom Watson. He had difficulty tracking the MP down. Ironically, on the first night, 28 September, Webb would have been more successful had he phoned the NOTW's political editor, Ian Kirby, who had spent the night drinking with Watson, the Sunday Mirror's Vincent Moss and the Mirror columnist Kevin Maguire in the bar of Brighton's Grand Hotel, where they sang songs round the piano until the early hours.

Tight security because of the presence of the Cabinet made following Watson difficult, but Webb billed the paper £1,125 for seven and a half shifts. Before and after following Watson (who was unaware of the surveillance) he tailed Alan Johnson, the Home Secretary.

The MPs had no knowledge of what NI was doing behind their backs. In January 2010 the committee decided that it wanted to hear from Rebekah Brooks, who was by then chief executive of NI...

The MPs decided they should hear from Brooks herself and asked her to give evidence. In a letter to John Whittingdale on 4 January 2010, she contemptuously dismissed the invitation to answer questions about the "supposed incongruity" between the treatment of Clive Goodman and Matt Driscoll, the "For Neville" email and misbehaviour by News International journalists, which, she said, related to the News of the World, not to other News International newspapers "any more than they do to any other national newspapers".

She asked whether the committee intended to call chief executives of other newspaper groups, said that the News of the World's editor had outlined the measures to end improper behaviour and that as chief executive she would "ensure the proper journalistic standards continue to be applied across all our titles"...

Although the committee wanted Brooks to give evidence, its members, whose private lives News International had pored over, capitulated and decided not to summon her. On the day the committee met to discuss the issue, two Labour MPs close to Tony Blair, Janet Anderson and Rosemary McKenna, were absent. The gay Plaid Cymru MP Adam Price - who in September unexpectedly announced that he would leave Parliament at the next general election to take up a Fulbright scholarship in the US - claimed that the committee's members had been warned that if they had called Brooks, their private lives would be raked over.

Mr Price said later: "I was told by a senior Conservative member of the committee, who I knew was in direct contact with executives at News International, that if we went for her, they would go for us - effectively they would delve into our personal lives in order to punish [us]."

The mystery phone call that led to a hidden trove of email evidence

In 2008, Max Mosley, the former head of motorsport's world governing body, and the son of the 1930s British fascist leader Sir Oswald Mosley, won a landmark privacy case against the 'News of the World'. A story had been published in the Sunday tabloid, written by Neville Thurlbeck, falsely accused him of taking part in a "sick Nazi orgy" which had been secretly photographed. The story appeared with pictures of Mr Mosley indulging in what was claimed to be a five-hour sadomasochistic sex session with prostitutes.

'Dial M for Murdoch' explains how Max Mosley's extraordinary next move - and a phone call from a stranger to Tom Watson - blew open the criminal wrongdoing at News International...

Two years after he had been turned over by the News of the World, Max Mosley was about to strike again. During the summer of 2010, from Monaco, he had been taking an ever closer interest in the phone hacking story and had become determined to ensure the police would not be able to cover up the Screws' seedy past.

He had started talking to Nick Davies at The Guardian and had also acquired a highly confidential source, Mr X, who had told him that Scotland Yard was holding extensive evidence about hacking at the NOTW. Mosley decided the best way to intensify the pressure was through cases in the civil courts which, through disclosure, would unlock the secrets of Mulcaire's files. But there was a problem: money. Under English law, litigants could be liable for costs, which could be crippling, and were often a severe deterrent to potential litigants.

Mosley agreed to underwrite the risk for several claimants, in both the emerging civil privacy cases against the News of the World and in the judicial review against Scotland Yard being coordinated by Tamsin Allen at Bindmans. If the cases were lost, his costs could run into hundreds of thousands of pounds, but Mosley was a multimillionaire.

He had decided he would risk half his fortune, if necessary, to fight Rupert Murdoch; ordinarily that half would have gone to one of his two sons, Alexander, but he was a regular drug user and had died of cocaine intoxication in May 2009. By early 2008 Alexander had temporarily managed to come off drugs but the News of the World's exposure of his father's sado-masochism had devastated him and was, his father believed, a contributory factor in his death. On 12 September, five days before Mosley returned to London at the end of his presidency of the FIA, Allen began judicial review against the Met at the High Court on behalf of Chris Bryant, Brian Paddick and Brendan Montague; they were joined a week later by John Prescott.

Sitting in his London mews house in Kensington in 2011, Mosley said: "I saw it as a much bigger thing than giving the News of the World a bit of their own back, or privacy generally, because I feel the Murdoch empire is a really sinister presence undermining the whole of our democracy. They are capable of suborning the police, Parliament and the government." He suspected the police had been reluctant to inform the victims "because they knew damn well there would be writs flying down to the High Court and their friends in Wapping would be upset".

In a memo to the Home Affairs Committee that was sent in October 2010, the lawyer Mark Lewis suggested several reasons why the police might not have properly investigated hacking in 2006, including a lack of resources, high-priority terrorism cases - and the closeness of the relationship between senior officers and News of the World executives. With the benefit of legal privilege over parliamentary affairs, he speculated whether the two officers who had said there were few victims, Andy Hayman and John Yates - both of whose own phones had been hacked - had been fearful of press coverage.

Lewis wrote: at the relevant time, Mr Hayman had reason to fear that he was a target of Glenn Mulcaire and the News of the World. It became public knowledge that throughout the period of the investigation into voicemail hacking, Mr Hayman was involved in a controversial relationship with a woman who worked for the Independent Police Complaints Commission and was claiming expenses which were subsequently regarded as unusually high. The same, of course, is also true of John Yates who, we now know, at the time when he responded to The Guardian's stories about Gordon Taylor's settlement with News Group, was involved in a controversial relationship with a woman who worked for the Met press bureau.

Lewis offered no evidence that the officers' behaviour towards the News of the World had been unduly influenced by fear, and Yates and Hayman both later denied that their conduct had been compromised by their relationships. With pressure building on the Met, News International became ever more determined to marginalise those making its life uncomfortable.

On 27 December [2010], high up in the peaks of the Yorkshire and Derbyshire border, a phone call transformed Watson's mood. Over previous weeks, a new source had been tantalisingly close to revealing important information. The source, who had very detailed knowledge of the information technology architecture of News Corp around the world, contradicted Watson's belief that data had been lost irrevocably.

As they talked for over an hour, Watson frantically wrote notes on small pieces of paper in his pockets, taking the names of the senior IT people and those that had recently left. He probed the contact while trying not to betray his increasing sense of euphoria.

Back in 2005 when Mulcaire and Goodman were conspiring to hack phones, the company bosses felt they were untouchable. They had politicians and police in their pockets, and they had no "predators"; Watson's logic was that with that level of power you would feel invulnerable - and if you thought yourself invulnerable, you would become complacent and make mistakes. He already knew that Brooks was complacent with her digital fingerprints because of the text message about him which she had sent in April 2009 to someone close to the Prime Minister. If others shared her arrogance, there would be a rich source of information on that second server that the police could use to crack the case. He did not know at that point that data had been or was being destroyed. But just as he had been losing hope, this new discovery reinvigorated him.

How lawyer stumbled on Soham scandal

Under conditions of secrecy in a windowless room at Scotland Yard, victims could inspect the notes about them, though they were not allowed to photograph or copy them. As the actress Leslie Ash and her husband Lee Chapman read Glenn Mulcaire's references to them [early in 2011], they accidentally discovered the "News of the World" had targeted Leslie Chapman - who was not Leslie Ash using her husband's surname, but the father of one of the two children killed at Soham in 2002.

The abduction and murders of 10-year-olds Holly Wells and Jessica Chapman, at the hands of school caretaker Ian Huntley, horrified the public.

Charlotte Harris, the couple's lawyer, recalled: "Leslie Chapman's papers were in front of us and the police were saying of the address: 'Yeah, well it's Fulham,' but it wasn't a Fulham postcode and I was looking at it, and being so familiar with Glenn Mulcaire's handwriting, I said: 'It doesn't say "Fulham", it says "Soham".'"

Dial 'M' for Murdoch