Phone-hacking: Where does it all go from here?

With some problems, there is a radical option that offers a breathing space. Cut the Gordian knot and suddenly things are clearer. But for David Cameron and Rupert Murdoch, as they face the drip-drip of damaging publicity over allegations that while editor of the News of the World the Tories' head of communications knowingly presided over a regime of illegal phone-hacking, radical surgery could make things even worse. With the setting up of two parliamentary inquiries into the affair and the police re-opening the case, both are faced with toxic questions that cannot simply be batted away. So what are their options?

Andy Coulson denies having known about the evidently extensive phone-hacking that went on, under his reign, by the private investigator Glenn Mulcaire. When Mulcaire and the former News of the World reporter Clive Goodman were convicted of hacking royal phones, and those of five other celebrities, three years ago, Coulson resigned, saying he had to take responsibility for what had happened on his watch. Since hiring Coulson a few months later, David Cameron has come to rely on his media chief's judgement of red-top preferences. A previously charming but not notably professional press operation evolved into a much tighter, tougher outfit.

But a growing number are unhappy about Coulson's presence at the side of the Prime Minister. Last year, for the first time, Coulson said explicitly that he knew nothing of Mulcaire's phone-hacking activities, and there is no reason to think the two met. Yet the dissenting voices continued, not least on the Culture Media and Sport Select Committee.

Cameron asked Coulson last year if there was anything in the allegations. Coulson said categorically that there was not, but allegations in the past 10 days from former News of the World journalists – named and unnamed – have undermined that claim. Coulson has shown characteristic doggedness in maintaining that position, with Downing Street insisting the claims are part of the bread and butter of opposition. Publicly, Cameron has stood by Coulson. But after a decidedly mealy-mouthed defence at PMQ by Nick Clegg when he stood in for Cameron, who was attending to his dying father, Cameron can't afford to ignore the issue.

No one has offered clinching evidence to damn Coulson, who says none exists. But enough people whose judgement Cameron respects are saying "something must be done" to require the Prime Minister to show some leadership. He could sack Coulson, as some say he should, because it is inconceivable that so much illegality could be being committed without the boss's knowledge. He could make a public show of backing Coulson, reiterating the "everyone deserves a second chance" position with which he appointed him. He could suspend Coulson, giving parliament and the police the opportunity to clear him. Or he could decide that the writing is on the wall and that Coulson should put out feelers with some of the City's better-heeled PR firms. Even this storm will die away, and in a few weeks' time – when the news agenda moves elsewhere – the hope would be that he could make a blameless exit.

Coulson's departure from No 10 might see off those who want blood, but there's every chance they would simply find a few focal point, which is where Rupert Murdoch comes in. Coulson was not alone in telling the Select Committee that he knew nothing about and would not have licensed any such illegality. That was endorsed by Les Hinton, the executive chairman of News International (NI), and the managing editor Stuart Kuttner. But today's report in the IoS of the extent of illegal activity seems likely to add to the pressure. Would Coulson's departure be seen as an admission of guilt? Quite possibly, and guilt is something NI's vigorous legal team is keen to deny.

Rebekah Brooks, its chief executive, made it clear she didn't demur from what the committee described as the company's "collective amnesia" position. Brooks had been invited three times to appear before the committee but chose not to attend, something the committee opted not to enforce. The Home Affairs Committee and, notably, the Standards and Privileges Committee will be less easily overcome, and lawyers in Wapping have been poring over legal tomes to see what powers the committees have.

The police are also showing renewed interest, although Assistant Commissioner John Yates's body language suggests a man who knows he is stuck between a rock and a hard place. Yates has said that he would look at any new evidence, suggesting that much of the recent storm relates to unprovable claims. Certainly, though, many of the hacking victims feel aggrieved at not being told that their numbers were found among Mulcaire's files (not in itself proof of anything, as Yates is at pains to explain), so at very least there is a PR job to be done.

How far will Yates push things? He has the option of calling some of those reporters and executives whom his predecessors on the case opted not to speak to. These include chief reporter Neville Thurlbeck, Greg Miskiw (assistant editor, news), Alex Marunchak, (senior executive, news), Ross Hall, who made a fleeting appearance in the original trial, and previous editors Phil Hall and Rebekah Brooks. Simplest of all would be to offer Glenn Mulcaire a deal, whereby – to the extent that it is in Yates's gift – Mulcaire is assured immunity in exchange for his assistance. In the end, the decision over further prosecutions will rest with the Crown Prosecution Service. Whether the CPS decides that a trial would have a better than 50-50 chance of success is a moot point.

But lawyers have been at work elsewhere, although NI has been strikingly anxious to avoid matters going to court. Two years ago, Gordon Taylor, chief executive of the Professional Footballers' Association and one of the five named in the Goodman-Mulcaire trial, was paid about £700,000 by NI in a confidential settlement for having had his privacy breached. Max Clifford seemed destined to take his case all the way to court, but settled for about £1m. Now one victim from the original case, the football agent Sky Andrew, is digging his heels in, to the consternation of his opponents, and about 20 politicians have consulted lawyers with apparently strong cases that their phones were hacked.

The IoS can reveal that another litigant has entered the fray. The victim of a high-profile crime, currently under investigation, has ascertained that both her phone number and those of her best friend and her boyfriend were in Mulcaire's files.

This means Mr Murdoch could face a legal bill at which even he would blanch. Estimates vary as to how many victims there were. Some cite the number of PIN codes found in Mulcaire's file – 91; others say the figure could run into thousands. One lawyer told the IoS that a complainant would face a legal bill of £200,000, or double that if the case came to court. Even if they settled for damages of £30,000 (modest by Max Clifford's standards), the bill would almost certainly end up on Rupert Murdoch's desk. The figures are necessarily imprecise, but the number of apparent victims would alarm the most phlegmatic of bean-counters. And while one or two high-profile settlements could be written off as exceptions, the prospect of a glut would alarm the City's share-price watchers.

And then there are the prospective story-tellers. Rumours abound as to which of Coulson's former lieutenants might break cover. None has yet emerged, which will comfort his defenders, and maybe they have nothing to tell. But for as long as the story fails to abate, feverish talk will continue. What is known is that the biggest prize of all, Glenn Mulcaire, has signed up with a literary agent, although under Press Complaints Commission rules his criminal record may limit his earnings. Mulcaire received a settlement from NI after he sued for wrongful dismissal. It is also believe that part of his confidentiality agreement included an indemnity by the News of the World to pay his legal fees (certainly that applied in the Max Clifford case, and if he isn't, lawyers wonder how he can afford Russell Jones & Walker, the notably blue-chip solicitors). Given the number of cases mounting up against the company, and that Mulcaire tends to be named as a co-defendant, he will have to think very hard before he jeopardises his relationship with Wapping. On the other hand, with John Yates and two House of Commons committees coming over the hill, he may think this is the moment to put us out of our misery and tell all.

Andy Coulson: The case for the defence

He wasn't in charge

Coulson became editor of the News of the World in January 2003 after three years as deputy editor. Most of the Blue Book pre-dates his reign, but the questionable tactics continued after his appointment. The work by private investigators was one step removed from the newsroom.

The rules changed

On 2 October 2000, the Regulation of Investigatory Powers Act 2000 came into force, modernising telecommunications law. It set out several actions, including accessing voicemail without permission, which were now illegal, while giving public bodies power to carry out surveillance and investigation. Journalistic tricks that had emerged as mobile phone and internet technology developed were banned. For some they were difficult habits to shake off.

He didn't know

The Culture Select Committee said it found no evidence that Coulson knew about phone-hacking when editor, but added: "Evidence we have seen makes it inconceivable that no one else at the News of the World, bar Clive Goodman, knew about the phone-hacking." Coulson has denied knowing about anything illegal on his watch. But he resigned when Goodman was jailed.

Public interest

Journalists using dark arts to uncover criminality or expose injustice can be a good thing. This defence does not stand up if it is used to obtain gossip about minor Royals or celebrities.