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The Australian-born billionaire's U.S.-based News Corp, thwarted in a key move to expand its media empire in television, said it would keep its 39 percent of the highly profitable pay-TV network, but left investors guessing over whether it might try again to buy up the rest, or even sell up.

The withdrawal removes the most pressing political conflict the company faced. But a police probe and new public inquiries into the scandal and into media regulation as a whole may keep an unflattering spotlight on it and weaken the influence the 80-year-old media magnate has enjoyed in Britain for decades.

"Successive prime ministers have cosied up to Murdoch," said politics professor Jonathan Tonge of Liverpool University.

"Now it's a new era. Political leaders will be falling over themselves to avoid close contact with media conglomerates. This is a turning of the tide. It's parliament versus Murdoch."

While there was no clear legal obstacle to letting the bid proceed via a regulatory review, having won informal government blessing some time ago, even Murdoch's dramatic closure of the scandal-hit News of the World tabloid had failed to stem public anger, leaving the $12 billion buyout politically untenable.

"With such universal political disapproval it would have been foolhardy to carry on," said stock analyst Steve Malcolm at Evolution Securities. "It would be a futile pursuit."

Conservative Prime Minister David Cameron, under fire over his own ties to former News of the World journalists, threw his government's weight behind an opposition motion on Wednesday that denounced Murdoch's bid to extend his media power while police were investigating whether his journalists hacked into the voicemails of thousands of people in search of stories.

"It has become clear that it is too difficult to progress in this climate," News Corp deputy chairman Chase Carey said, adding that the group, whose top executives have gathered in London, remained "a committed long-term shareholder" in BSkyB.

SHARES BOLSTERED

Shares in News Corp, also owner of Fox television and the Wall Street Journal in the United States, had shed 15 percent in a week on fears of widening damage to its brands and a loss of opportunity in television. They ended the day up 3.8 percent as investors welcomed relief from poisonous publicity.

BSkyB closed up around 2 percent.

Shareholders had been concerned by talk from politicians in the United States and Australia about mounting investigations. In Washington, three senators said on Wednesday that the Justice Department and securities regulator should investigate whether News Corp broke laws in the United States over phone hacking.

There have been reports that families of victims of the 9/11 attacks may have been targets of would-be phone hackers.

A Justice Department spokeswoman said they would review the letters sent by the senators as part of standard practice, but that did not mean an investigation would be initiated.

For a week, Britain has been in uproar since a major turn in the long-running saga of phone-hacking by the News of the World. Rival newspapers published allegations that, far from being limited to spying on the rich or powerful, the practice extended to victims of crimes, including child murders and the 2005 London bombings, as well as to parents of Britain's war dead.

Cameron has been embarrassed by the arrest of his former spokesman -- a former News of the World editor -- and has had little choice but to follow the popular mood against Murdoch and News International, News Corp's powerful British newspaper arm which also owns the best-selling Sun tabloid and London's Times.

"This is the right decision," Cameron said of the withdrawal of the BSkyB bid. "This company clearly needs to sort out the problems there are at News International, at the News of the World. That must be the priority, not takeovers."

A person familiar with News Corp's dealings said Murdoch is now turning his attention to dealing with the political, legal and regulatory fallout from the hacking scandal. Having closed News of the World and abandoned the BSkyB deal, he has resolved immediate business issues. Any further review of business assets, including possible sale of its UK newspapers, would be considered at a later date, the source said.

The Wall Street Journal reported that News Corp was assembling its legal team of big-name lawyers to lead the damage control efforts, and it includes a former head of U.K. prosecution and a prominent Washington D.C. law firm, Williams and Connolly LLP.

Moody's is the first of the big-three rating agencies to place the United States' Aaa rating on review for a possible downgrade, which means it is close to cutting its rating.

In a statement, Moody's said it sees a "rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on U.S. Treasury debt obligations."

A lower credit rating would cause havoc in financial markets around the world and increase borrowing costs for the government and businesses, further harming public finances and weighing on the economic recovery.

Risks of a default on Treasuries, traditionally seen as the world's safest investment, have increased since the government reached its legal debt limit of $14.294 trillion on May 16. Congressional leaders and President Barack Obama are locked in tense negotiations to raise the limit by August 2.

Standard & Poor's in April placed the U.S. rating on negative outlook, which means a downgrade is likely in 12-18 months.

The Congress has routinely raised the nation's debt limit in the past. This time, however, negotiations seem to have stalled over the balance between raising taxes and cutting spending.

So far, Treasury Secretary Timothy Geithner has been able to resort to extraordinary measures to delay a debt default by at least August 2.

Unlike Fitch, which promised to cut the U.S. ratings to "restricted default" after a few missed debt payments, Moody's has said it would downgrade the United States to the "Aa" range, still considered investment grade.

(Reporting by Walter Brandimarte and Daniel Bases; Editing by Leslie Adler and Stella Dawson)

The British parliament was due to pass a non-binding vote later in the day calling on Murdoch to drop his bid after allegations emerged that journalists at News Corp's UK newspaper arm had hacked into the phones of a murdered school girl and dead soldiers to generate stories.

BSkyB shares were down 1.2 percent after the news, after falling around 20 percent since July 4 when the hacking scandal at tabloid News of the World worsened, prompting the government to launch an inquiry into journalistic practices and phone hacking.

"We believed that the proposed acquisition of BSkyB by News Corporation would benefit both companies but it has become clear that it is too difficult to progress in this climate," said Chase Carey, Deputy Chairman, President and Chief Operating Officer, News Corporation.

"News Corporation remains a committed long-term shareholder in BSkyB," he said, in reference to its 39 percent holding.

Analysts said they were not surprised.

"I think with such universal political disapproval it would have been foolhardy to carry on at this stage," said Evolution analyst Steve Malcolm."

"I think they need to get the phone hacking investigation and the judicial reviews completed, see what gets thrown out of that and regroup. If they are in position at the end of that to have another look at it then they are, but at the moment it would be a futile pursuit given the public and political objections and disapproval."

Ian Whittaker at Liberum said it was difficult for News Corp to continue with the bid following the "savage attacks" being dealt out in parliament.

"Probably they also didn't want the spotlight on them," he told Reuters. "There are worries about it spreading to the US."

News Corp made the bid for BSkyB last June and said the two companies would secure regulatory approval before negotiating the price. Murdoch's company had expected to get approval by now, but the bid was derailed after the hacking scandal exploded again last week.

(Reporting by Kate Holton; editing by Alex Smith)

Testimony from Federal Reserve Chairman Ben Bernanke will also be scrutinized for hints of new stimulus measures after June's dismal U.S. employment report.

Optimism about the health of the global economy gathered pace after data showed China's economy grew faster than expected in the second quarter, easing fears about a hard landing in the world's second-largest economy.

But Nicholas Colas, chief market strategist at the ConvergEx Group in New York, said optimism over China would be unlikely to sustain a rally in the face of mounting investor concerns over sovereign debt at home and abroad.

"We are really focused on sovereign debt issues and those are still first and foremost," he said. "Euro zone sovereign debt issues will soon be overtaken by the federal debt limit debate ... and that's not a positive for stocks either."

S&P 500 futures rose 7.2 points and were above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures rose 51 points, and Nasdaq 100 futures added 14.50 points.

Investors remained cautious over developments in Europe. Moody's downgraded Ireland's debt to junk on Tuesday and said Ireland was likely to follow Greece in needing a second bailout. Irish bond yields jumped to record highs.

U.S. stocks closed lower for a third straight day on Tuesday as Europe's fiscal woes and a weak start to tech earnings gave investors little reason to buy.

Investors will be watching testimony from Ben Bernanke a day after minutes from a Fed meeting suggested the possibility of more stimulus measures. Bernanke is set to give a semiannual report on the economy and monetary policy to the House Financial Services Committee beginning at 10 a.m. (1400 GMT).

The inability of Washington to find a solution to U.S. debt issues is frustrating investors. President Barack Obama and top U.S. lawmakers fell short on Monday of finding enough spending cuts for a deal to avoid an August 2 debt default, and Republicans came under fresh pressure to agree to tax hikes.

Electronic Arts Inc (ERTS.O), the video game publisher, is buying PopCap Games in a deal worth up to $1.3 billion as it tries to ramp up its social and casual games portfolio and better compete with Zynga Inc. The company's shares fell 2.8 percent to $23.50.

Netflix Inc (NFLX.O) hiked monthly prices for customers who use both its mail and online services, a move that could steer users toward its growing Internet streaming service.

In Europe, the FTSEurofirst 300 .FTEU3 index of top shares were flat, with mining shares up along with metals prices on encouraging data from China. Japan's Nikkei .NK225 rose 0.4 percent.

(Editing by Kenneth Barry)

Minutes to the central bank's June meeting on Tuesday suggested that, while some members were pondering the possible need for additional easing amid a weak economy, the Fed is not yet ready to take any further action.

Congressional leaders, themselves paralyzed by an acrimonious fight over the nation's debt ceiling, will likely press Bernanke on how much further growth would have to slow in order for the Fed to step in.

"The consensus will continue to be for the Fed to keep the policy rate unchanged as the economy navigates through the current headwinds," said Millan Mulraine, economist at TD Securities.

Dismal employment data last week suggested the economic recovery is faltering despite unprecedented monetary stimulus from the Fed, including a controversial $600 billion bond buying program completed at the end of last month.

Bernanke, who testifies before the House of Representatives on Wednesday and the Senate on Thursday, will likely be asked why the policy has not been more effective at bringing down unemployment, which rose again in June to 9.2 percent.

Adding to the sense of urgency in the testimony, Europe's worsening debt crisis should be expected to feature prominently in the debate. Fed officials had said the U.S. faced little exposure from the continent's financial woes, but sounded a bit more worried in the June meeting.

"An escalation of the fiscal difficulties in Greece and spreading concerns about other peripheral European countries could cause significant financial strains in the United States," the meeting minutes said.

As Washington ties itself in a knot over the debt ceiling, Bernanke will almost certainly reiterate his message that the consequences of not lifting the statutory limit and causing the Treasury to default would be disastrous.

He will also urge Congress against steep near-term cuts in spending at a time when the recovery already looks tepid.

Analysts will be combing his remarks for any hints that the Fed's forecasts for economic growth, revised down at the June meeting, might be again headed to the chopping block in coming months.

If growth in the second half of the year proves weaker than the Fed expects and, importantly, if inflation moves back down, officials might then begin considering a third round of so-called quantitative easing, or QE3.

U.S. gross domestic product grew just 1.8 percent in the first three months of the year, and the second quarter does not appear to have been much better. For 2011 as a whole, the Fed sees U.S. GDP expanding 2.7 percent to 2.9 percent, down from forecasts in a range of 3.1 percent to 3.3 percent back in April.

* Optimism about the health of the global economy gathered pace after data showed China's economy grew faster than expected in the second quarter, easing fears of a hard landing.

* Following minutes of the latest Federal Reserve meeting which suggested the possibility of more stimulus measures, Fed Chairman Ben Bernanke is set to testify before the House of Representatives on Wednesday and the Senate on Thursday, and will likely be asked why the Fed's current stimulus measures have not been more effective at bringing down unemployment.

* U.S. stocks closed lower for a third straight day on Tuesday as Europe's fiscal woes and a weak start to tech earnings gave investors little reason to buy even after recent losses.

* Marriott International (MAR.N) is set to report second- quarter results, with analysts expecting the firm to report earnings per share of $0.37 from $0.31 a year ago.

* Yum! Brands (YUM.N) is also scheduled to release second- quarter results, with earnings per share seen rising to $0.61 from $0.58 a year earlier.

* On the data front, the latest weekly U.S. mortgage and refinancing indexes will be released at 1100 GMT, with June import and export prices due at 1230 GMT, and June's Federal Budget at 1800 GMT.

* In company news, Electronic Arts Inc (ERTS.O), the video game publisher, is buying PopCap Games in a deal worth up to $1.3 billion as it tries to ramp up its social and casual games portfolio and better compete with Zynga Inc.

* Netflix Inc (NFLX.O) hiked monthly prices for customers who use both its mail and online services, a move that could steer users toward its growing Internet streaming service.

* In Europe, the FTSEurofirst 300 .FTEU3 index of top shares was flat in early trade, with mining shares rallying along with metals prices on the back of the encouraging data from China.

(Reporting by Harpreet Bhal; Editing by David Holmes)