Analysis: News Corp scandal biggest challenge so far for Cameron

By Jodie Ginsberg

LONDON (Reuters) - He has faced criticism over threats to impose a U.S.-style healthcare system, plans to reduce sentences for rapists, and proposed cuts to pensions and benefits.

But it is his decision to hire a former journalist tainted by a phone-hacking scandal that is posing the greatest test of British Prime Minister Cameron's year-old leadership.

Cameron recruited Andy Coulson as his spokesman in 2007, six months after Coulson's resignation as editor of the News of the World over phone-hacking that saw his royal editor jailed -- and which this week forced the closure of the paper.

"There was this big media trial in the offing," Guardian editor Alan Rusbridger told Reuters, noting the trial involved one of the investigators, subsequently jailed, whom Coulson's paper had used.

"I just thought Cameron ought to know because at the time he was going around saying he totally believed in Coulson... I wasn't the only Fleet Street figure to warn about Coulson to Cameron," said Rusbridger, whose paper has broken story after story about the scandal.

JUDGMENT IN QUESTION

On Friday the Prime Minister defended his decision to retain Coulson, even as his former spokesman was at a police station answering questions about the affair. A police source later said Coulson had been arrested.

"On the issue of what I was told, I wasn't given any specific sort of actionable information about Andy Coulson," Cameron said during repeated questioning of his judgment in hiring and retaining Coulson, who resigned as communications director in January after the phone hacking claims resurfaced.

"The decision I took was the same decision right from the beginning, that ... very bad things had happened at the News of the World, he had resigned, I gave him a second chance, he had proved himself as an effective person in opposition and it was acceptable for him to come into Downing Street," Cameron said.

But Rusbridger and others said it raised serious questions about Cameron's judgment. The Prime Minister is also under fire for his close links with Coulson's predecessor, Rebekah Brooks, who now runs Murdoch's entire UK news operation and who is reportedly a frequent guest at Cameron's country home.

Allegations have surfaced that the practice of illegally accessing voice messages with which Coulson was linked dated back to her time at the paper. The leader of the opposition Labor party has called on her to resign.

Even Cameron said on Friday he thought Murdoch should have accepted Brooks' reported offer to resign as News International Chief Executive.

Brooks and Cameron - whose party won the backing of Murdoch's newspaper empire before the 2010 election -- are said to go horse-riding together. Along with then Prime Minister Gordon Brown, Cameron was a guest at her wedding two years ago.

QUESTIONS ASKED

Cameron is by no means the only political leader to have hired a media adviser from among the popular press -- nor the only current leader to have chosen one from the News International stable.

Labor leader Ed Miliband, who on Friday said it was difficult for Cameron to speak out "because of his personal relationships and the powerful forces here," has former Times' journalist Tom Baldwin as a media strategist

Notorious spin doctor Alastair Campbell, one of Tony Blair's closest advisers, was a former journalist at the Daily Mirror, the left-leaning tabloid.

But though the scandal will tarnish Cameron, few think it will topple him.

The government has said previously it does not plan to hold an election until it has to in 2015. That gives Cameron time and space to repair the damage from the News of the World scandal.

"I think it will damage him, but it won't sink him" said Tim Bale, professor of politics at the University of Sussex, who has written books on the Conservative party. "I think the Conservative Party will rally round him but he has been damaged and his judgment has been called into question."

Andrew Russell, senior lecturer in politics at Manchester University, said the normally confident Cameron looked awkward when questioned about Coulson on Friday.

"He seemed to have a slippage of authority, he seemed rather uncomfortable," he said.

"There are moments when authority bleeds from leaders. You might think of Iraq (and Tony Blair), or Nixon and Watergate."

Russell said he did not think we are in "that kind of territory but it does seem to be a developing story."

"It would be tempting to think it could be his version of Iraq, or tuition fees for (deputy prime minister) Nick Clegg. But on Iraq, don't forget that Blair won another pretty comfortable election victory after 2003."

(Additional reporting by Matt Falloon and Tim Castle; editing by Janet McBride)