LONDON - James Murdoch knew more than three years ago that phone-hacking at News Corp's News of the World went beyond one "rogue" reporter, the newspaper's former legal chief said on Tuesday, contradicting repeated denials by Murdoch.

As the two-month crisis that has gripped News Corp and Britain's political establishment deepened, Tom Crone also said he had seen evidence that the company had recently hired freelance reporters to spy on hacking victims' lawyers.

In a statement, James Murdoch stuck to his denial that he had known at the time that hacking was more widespread but Crone's repeated allegations, and the mention of recent spying, cast doubt on Murdoch's effectiveness in weeding out wrongdoing.

News Corp has been engulfed by the scandal since July when it was revealed that the phone hacking extended beyond celebrities and politicians to murder victims including schoolgirl Milly Dowler, and British war dead.

The crisis has already wiped billions of dollars off News Corp's market value, cost it two senior executives, forced it to drop a $12 billion bid for BSkyB and to shut down the 168-year-old News of the World tabloid.

James Murdoch, News Corp's deputy chief operating officer has seen his chances of succeeding his father and founder of the media empire, Rupert, receding.

Charlotte Harris of law firm Mishcon de Reya, which is representing several hacking victims suing News Corp's UK newspaper unit News International, said the contradictory statements from James and his former executives were evidence of a deepening split in the company.

"The old guard and the new guard are no longer cooperating," she said, adding that the parliamentary committee would almost certainly have to recall James, whom it had subjected to a grilling last month along with his father.

The new allegations of spying on victims' lawyers is bound to give fresh ammunition to the Murdochs' critics.

Mark Lewis, who is representing hacking victims including supermodel Elle Macpherson's former assistant Mary-Ellen Field and jockey Kieren Fallon, says he was one of the lawyers on whom News International ordered surveillance to be carried out.

"What does surprise me is the failure by News International to inform me or at least to notify the police," he said.

Charlie Beckett, founding director of the Polis journalism think-tank at the London School of Economics, said: "This shows that this idea that James Murdoch has been working post-2007 to clear out the stables has not been true."  

"It's not illegal for them to do things like this but it doesn't speak volumes about their real commitment to a thorough transparency," he added.

The crisis has pushed Prime Minister David Cameron, once so close to the Murdoch media empire that he hired ex-News of the World editor Andy Coulson as his spokesman, to join his opponents in condemning Murdoch, and to order a public inquiry.

On Tuesday, Cameron told parliamentarians that the UK should resist the temptation to over-regulate the media in the wake of the scandal. "There is a danger of the pendulum swinging too far the other way," he said.

Settlement

Crone repeated that he had explained to James Murdoch in 2008 the significance of a key email obtained by a hacking victim, which contained transcripts of intercepted voicemails unrelated to the activities of "rogue" reporter Clive Goodman, who had already been to jail.

"This document meant there was a wider News International involvement," Crone told the committee, when asked to explain what he had told Murdoch in a meeting in which Myler, the tabloid's last editor, was also present.

Myler and Crone said the email, with its suggestion of hacking by other journalists, was the only reason Murdoch had approved a 700,000 pound ($1.1 million) payout to the victim, soccer executive Gordon Taylor.  

"I would take it that...for the first time he realised the News of The World was involved, and that involved people beyond Clive Goodman, and on that basis he authorised the settlement," said Crone.

Murdoch, who took charge of News Corp's European operations in late 2007, has repeatedly said he did not know the phone-hacking went beyond ex-royal reporter Goodman and private detective Glenn Mulcaire, who both served jail terms in 2007.

"Neither Mr Myler nor Mr Crone told me that wrongdoing extended beyond Mr Goodman or Mr Mulcaire," he said in his statement on Tuesday. "There was nothing discussed in the meeting that led me to believe that a further investigation was necessary."

"I was informed, for the first time, that there was evidence that Mulcaire had carried out this interception on behalf of the News of the World. It was for this reason alone that Mr Crone and Mr Myler recommended settlement," he wrote.

James Murdoch was not in charge of News International at the time the hacking that is known about occurred. But he joined shortly afterwards and presided over what may turn out to have been a huge corporate cover-up.

On Tuesday, members of the committee frequently appeared exasperated by the witnesses' repeated claims to have no recollection of key events and documents.

Crone said he had not read the Gordon Taylor file since he last gave evidence to parliament on the matter in 2009, eliciting an incredulous response from lawmaker Tom Watson, the committee's most dogged questioner.  

"What on earth were you doing for two years, Mr Crone? The entire focus of public enquiry has been on the Taylor payment, you were the legal director of News Group Newspapers and you are seriously telling me you have not reviewed that file in over two years?" he asked.

"Not in any detail, no," Crone replied, shrugging.

Earlier on Tuesday, two other ex-News International executives said the company had done all it could to investigate a 2007 claim by Goodman, made as part of an appeal against unfair dismissal, that hacking was commonplace.

Daniel Cloke, who ran News International's human resources at the time, said no evidence had been found to support Goodman's claim, which was published by the parliamentary committee last month  

"At that particular moment in time, this was one employee -- ex-employee -- making allegations about others," Cloke said when asked why the company had not done more to uncover the scale of the phone hacking.

"We interviewed those people, we also then looked at around 2-2,500 emails and then took it to a third party," he said. "That gave me comfort as an HR director that we had covered the bases and done the proper thing."

Asked why the company had approved payments of a quarter of a million pounds to Goodman after he lost his unfair dismissal appeal, Cloke and ex-commercial lawyer Jon Chapman presented it as pragmatism, not a measure calculated to buy his silence.

" It was a stark choice -- settle at a reasonable figure or end up in tribunal," Chapman said. "At the tribunal proceedings, Mr Goodman would have been able to make a number of allegations, which we didn't believe... in a public forum."