Lawmakers also demanded answers after The Guardian reported that the News of the World - the country's most popular Sunday paper - paid private investigators to obtain voice mail messages, private phone numbers, bank statements and other information about figures including Gwyneth Paltrow, George Michael and some of the country's most senior politicians.
Metropolitan Police Commissioner Paul Stephenson said he had appointed a senior Scotland Yard officer, Assistant Commissioner John Yates, to look into the allegations against the News of the World, which is owned by News International Ltd., a subsidiary of Murdoch's News Corp.
"We will investigate thoroughly and follow the case to where it leads us," Stephenson told Sky News.
Home Office Minister David Hanson said police would make a statement later Thursday on the "serious allegations."
Citing anonymous senior police sources, the Guardian reported that journalists at the tabloid used private investigators to hack into private voicemail messages, using the information to "gain unlawful access to private data, including tax records, social security files, bank statements and itemized phone bills."
It said other targets included London Mayor Boris Johnson, celebrity chef Nigella Lawson and politicians from Britain's three main parties.
The Guardian wrote that the News of the World had paid more than 1 million pounds ($1.6 million) in secret out-of-court settlements to three of the targets, including Gordon Taylor, chief executive of the Professional Footballers' Association.
News International said in a statement that it would be "inappropriate to comment at this time."
The report re-ignites a long-simmering debate about the ethics of Britain's newspapers, which compete aggressively for readers and stories. An exclusive about a politician or celebrity can mean hundreds of thousands of extra copies sold for a tabloid like the News of the World, which has a circulation of about 3 million.
In 2006, Information Commissioner Richard Thomas said in a report that there was "an unlawful trade in confidential personal information," with much of it going to the media.
The following year the News of the World's royalty editor, Clive Goodman, was ordered jailed for four months for hacking into royal officials' voicemail systems.
Goodman's accomplice, private investigator Glenn Mulcaire, was sentenced to six months in prison for hacking into the messages, including some from Princes William and Harry. The judge said Mulcaire duped mobile phone network operators into passing him confidential PIN numbers to access messages left on the cell phones.
Britain's Data Protection Act makes it an offense to "obtain, disclose or procure the disclosure" of personal information without consent.
News International executives said Goodman had acted without the knowledge of other journalists or editors. But the Guardian said that during the investigation into Goodman, evidence emerged that the News of the World had used private investigators to hack into the phones of as many as 3,000 public figures.
Adrian Monck, head of the journalism program at London's City University, said many media-watchers believed the Goodman story "was not an isolated, one-off case."
"For years the stock-in-trade of tabloid journalists has been the ability to get this kind of secret information," he said.
The News of the World's editor at the time of the Goodman case was Andy Coulson, now director of communications for opposition Conservative Party leader David Cameron. He resigned from his newspaper post after Goodman was sentenced, but said he had no knowledge of the hacking.
Cameron said he had given Coulson a "second chance" by hiring him after he left the News of the World.
"As director of communications for the Conservatives he does an excellent job in a proper, upright way at all times," Cameron said Thursday.
The Guardian reported that the House of Commons was also to launch an investigation into the alleged wire tapping, and would likely call Coulson to provide evidence.
Former Home Secretary Charles Clarke said that the allegations in The Guardian raised serious questions for News International, the Conservatives, and the police.
"I think it is outrageous," he said. "I think we do need action immediately."