(Reuters) - James Murdoch resigned as executive chairman of News International on Wednesday, raising new doubts he can succeed his father Rupert as CEO of parent company News Corp (NWSA.O) in the wake of a phone hacking scandal at the unit he oversaw.
It also raises the possibility that one of his older siblings -- Elisabeth or Lachlan -- could emerge as an eventual contender for the top job, according to people familiar with the matter.
Other sources suggested a contrarian view of James' departure from News International, interpreting the move to focus him on operations based out of corporate headquarters in New York as Rupert defying his doubters by bringing his embattled son closer to the company's power center. That would dovetail with another counterintuitive move the elder Murdoch made recently: launching a Sunday edition of his tabloid The Sun newspaper in London last week amidst an investigation that had led to the arrest of several journalists at that paper in addition to those of the now-defunct News of the World.
The younger Murdoch, once seen as heir apparent to his 80-year-old father, has been under pressure since the phone-hacking scandal erupted last summer at the British newspapers. His resignation is the latest in a flurry of senior executive resignations from News International since the scandal came to light.
Thousands of celebrities and everyday citizens had their voice mails hacked by journalists at News International newspapers before James took over but he has been heavily criticized for his handling of the affair afterwards. The company has paid out millions of dollars in settlement fees to date with more expected to come.
"We won't miss him," said a News International insider who asked not to be named. "His contribution to dealing with this whole (hacking) issue has been unimpressive at best as well as his lack of ability to see what was going on himself and to do anything about it."
James will remain deputy chief operating officer of News Corp with a focus on its international TV business, a New York-based post he was promoted to last year.
Analysts said the move was unsurprising in one sense because Rupert Murdoch would be keen to distance his son from the troubles in London.
"It makes sense to get James as far away from News International as possible, if he is to have any hope of re-establishing his position in the company," said Steve Hewlett, a London-based media analyst.
"The more revelations there are about phone hacking and all the rest of it, the sharper the focus on what he knows or didn't know will become. There's no suggestion he is involved in any of it; it's all about what he knew."
James Murdoch has already made a move to his new job in New York, though his family is still based in London for now. He stepped down as a director of London-based GlaxoSmithkline (GSK.L) last year. Analysts pointed out that despite moving to New York he would still need to answer to any charges or UK government inquiries that might arise related to the hacking case.
The move appears to further strengthen the position of News Corp President Chase Carey, who is now favored by investors to take the top job at the Murdoch family controlled media conglomerate.
"It clarifies the management hierarchy and clarifies Chase Carey as the person who's both No. 2 and No. 3 behind Rupert Murdoch," said Collins Stewart analyst Thomas Eagan. "That's a good thing. I think the operations are going well."
News Corp's shares hit a new 52-week high on Wednesday morning of $20.35. Analysts and investors have remained ambivalent to the phone hacking scandal throughout the last year, noting that newspapers make up only a tiny portion of News Corp's overall business.
News Corp Chairman Rupert Murdoch said in a statement his son would still play a key role at the company.
The elder Murdoch has spent most of the last two weeks in London overseeing The Sun's Sunday launch. The move was seen as an effort to boost staff morale following an ongoing internal investigation into his newspapers' journalistic operations.
"I think it is clearly regrettable that any of this happened but it did and as a shareholder I believe the company has behaved very responsibly to find the people who were responsible," said Larry Haverty, a portfolio manager at Gabelli Multimedia Funds.
FAMILY POWER STRUGGLE
A source familiar with internal company machinations said that even before Rupert Murdoch left for his latest trip to London it was becoming apparent that James Murdoch's prospects to succeed his father at the head of the News Corp empire were fading.
Powerful company insiders close to the internal investigation News Corp set up to clean up the company's UK newspapers have come to question James' record heading the unit, according to the source. They also question his responses to the phone hacking scandal as it unfolded.
As a consequence, Rupert's eldest son, Lachlan, who dropped out of contention as heir apparent as a result of a brutal corporate power struggle that forced him out of the company in 2005, appeared at his father's side in London last week. But James was nowhere in sight even though he nominally remained executive chairman of the British newspaper interests.
Company sources cautioned, however, that Lachlan is content to continue building his own business back in his native Australia and is uninterested in returning to News Corp at the moment. Still, his father has repeatedly tried to entice Lachlan back into the fold with numerous job offers.
Sources said that daughter Elisabeth Murdoch, whose independent London-based television production company, Shine, was acquired by News Corp last year, has been waiting quietly in the wings and is regarded by some as the current favorite to succeed her father, if any family member ultimately is allowed to make that move.
James Murdoch's resignation comes after a new spate of embarrassing revelations in London at the judge-led Leveson Inquiry into press standards, which was ordered by British Prime Minister David Cameron in the wake of the phone hacking scandal.
A police officer heading three criminal inquiries into reporting practices at News International testified on Monday that there was a "culture of illegal payments" to corrupt public officials at the company's flagship Sun newspaper.
The Inquiry also brought to light an email from a top in-house lawyer at News International that showed senior managers had been told as far back as 2006 that illegal phone hacking was not confined to one "rogue reporter," as the company maintained for years afterward, but was likely to have been far more widespread, as later proved to be the case.
(Reporting By Yinka Adegoke in New York and Mark Hosenball in London,; Additional reporting by Sinead Carew in New York; Paul Sandle and Estelle Shirbon in London; Editing by Peter Lauria, Derek Caney, Phil Berlowitz and Bernard Orr)
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