By Kate Holton and Georgina Prodhan
LONDON (Reuters) - New evidence of hacking at Rupert Murdoch's News of the World points to a four-year cover-up by the company, and intensifies focus on Prime Minister David Cameron's judgment in hiring an ex-editor who may now face criminal prosecution.
A letter written in 2007 by ex-royal reporter Clive Goodman says former editor Andy Coulson, who went on to become Cameron's spokesman, banned talk in editorial meetings of phone-hacking but not the practice itself, which Goodman said was common.
If true, Goodman's allegations would mean that Coulson lied not only to Britain's parliament but also under oath as a witness in a 2010 criminal trial, when he repeatedly denied that there was a culture of phone-hacking at the News of the World.
It would also imply that many more senior figures at the News of the World knew about the illegal news gathering practice, casting doubt on repeated statements of ignorance by executives.
The scandal has already caused the resignation of several company executives and two of Britain's top policemen, and forced Murdoch to shut down the News of the World and drop a cherished $12 billion bid for pay-TV broadcaster BSkyB.
The Goodman letter also spells political trouble for Cameron, who hired Coulson as his director of communications in 2007, four months after his resignation from the News of the World.
The prime minister has said he wanted to give Coulson a second chance and that they became friends. However, last month he said he regretted the appointment and would offer a "profound apology" if Coulson turned out to have lied.
Cameron is currently fighting a moral crusade against rioters who swept parts of the country last week.
Professor Jonathan Tonge, politics professor at Liverpool University, says Cameron's efforts to hire Coulson as a "man of the people" to counterbalance the many privileged members of his Conservative government, had backfired.
"There's always the argument: Does the average man and woman in the street care about all this?" he says.
"But an image is created of a government that at its margins had some shady characters. People don't want to be preached at by a Conservative government when some of their appointments have been from what you might call, not the moral high ground of society."
The emergence of Goodman's letter is the latest twist in the deepening scandal, which saw the former tabloid reporter sentenced to four months in jail for hacking in 2007. Until earlier this year, the News of the World's parent company News International, a unit of News Corp, maintained he was a "rogue reporter" acting on his own.
"What we're starting to see appears to be the unraveling of a cover-up," says Amanda Ball, senior lecturer in media law at Nottingham Trent University's Center for Broadcasting and Journalism.
James Murdoch, the News Corp executive who took charge of News International shortly after Goodman and private detective Glenn Mulcaire went to jail, has also repeatedly denied he knew until recently that hacking went beyond Goodman and Mulcaire.
Goodman's letter, published on Tuesday by a British parliamentary committee investigating the phone-hacking, was not intended for publication but was sent to News International executives as part of an appeal against his dismissal.
"This practice was widely discussed in the daily editorial conference, until explicit reference to it was banned by the Editor," Goodman wrote. "Other members of staff were carrying out the same illegal procedures."
In the letter, he also complained that Coulson and News International's then-top lawyer Tom Crone had not honoured a pledge to give him his job back as long as he did not implicate anyone else during his trial.
"Goodman's devastating letter has really put News International, particularly Coulson, right back in the firing line," says media lawyer Jennifer McDermott, a partner with Withers Worldwide.
The letter, which was censored in places to obscure names of individuals, was sent to News International's then-human resources director Daniel Cloke, ex-Executive Chairman Les Hinton, and ex-News of the World Managing Editor Stuart Kuttner.
James Murdoch also submitted Goodman's letter as part of his evidence to the committee, but removed mention of Coulson, the daily editorial meetings and the job promise.
"That is very telling," said McDermott.
Hinton, who told parliament four days after receiving the letter that he had not seen any evidence to suggest the hacking involved anyone else, went on to become chief executive of News Corp's Dow Jones but resigned last month.
Kuttner was arrested two weeks ago, while Cloke now works for British telecoms operator Vodafone.
"If I was doing crisis management for News International, I would be painting Goodman as a bitter man, but that's not so easy when you look at when the letter was written and who the intended audience was," says media law professor Ball.
"He could have said all this in court but he didn't. All he wanted was his job back."
Murdoch is likely to be recalled by the committee to give further evidence in October.
His questioning has centered on the so-called "for Neville" email containing transcripts of hacked voicemails, which shows the hacking went beyond Goodman -- and whether he knew of its existence when he approved a large payoff to a hacking victim.
He has maintained that he did not, but that has been contradicted by News International's former legal chief Tom Crone and the News of the World's last editor Colin Myler, who have said they made him aware of the email in 2008.
"They have shown phenomenal arrogance," says Peter Burden, author of a 2008 book on the News of the world.
"There's a sense that they just thought that if they toughed it out and paid people off, like Gordon Taylor -- and Goodman was also paid a large amount of money to shut him up -- that they thought they could keep a lid on it."
Coulson, who resigned from the News of the World on the day that Goodman and Mulcaire were sentenced to jail, was arrested last month on suspicion of conspiring to intercept communications and suspicion of corruption.
He had previously been interviewed by police in November and is due to appear before police again in October.
Separately, Scottish police have begun a preliminary investigation into evidence given by witnesses including Coulson at the 2010 perjury trial of Scottish politician Tommy Sheridan on suspicion that the witnesses themselves committed perjury.
In addition to denying knowledge at the time of phone-hacking -- of which Sheridan claims to have been a victim -- Coulson told the trial he had no knowledge of any payments made by the News of the World to police for tip-offs.
Emails since obtained by the police appear to show Coulson authorizing such payments to the police while he was editor.
(Additional reporting by Keith Weir; Writing by Georgina Prodhan; Editing by Jon Boyle)