By Georgina Prodhan and Kate Holton
LONDON (Reuters) - Rupert Murdoch is not fit to run a major international company, British lawmakers said on Tuesday, finding him ultimately responsible for the illegal phone hacking that has convulsed his media empire and damaged the political establishment.
Pulling few punches, the lawmakers said the 81-year-old News Corp chief lacked credibility, his son James appeared incompetent and the company was guilty of "willful blindness" towards its staff at the News of the World tabloid.
The cross-party parliamentary committee, which approved the report by a majority of six to four, also scolded News Corp's British newspaper arm for misleading parliament during its five year investigation into the hacking of the phones of celebrities, murder victims, politicians and soldiers.
But it split along party lines, with members from Prime Minister David Cameron's Conservative Party voting against the report, saying they did not agree with its view that the Australian-born Murdoch was not fit to run a major company.
Cameron is facing criticism ahead of local elections this week that he was too close to the media tycoon, who won government approval to take over British pay-TV operator BSkyB, before dropping the bid when the scandal broke.
The report said there had been huge failures in corporate governance which raised questions about the competence of Rupert's 39-year-old son, James.
"News International and its parent News Corporation exhibited willful blindness, for which the companies' directors -including Rupert Murdoch and James Murdoch - should ultimately take responsibility," it said.
"We conclude, therefore, that Rupert Murdoch is not a fit person to exercise the stewardship of a major international company."
Murdoch said the report had made difficult reading. "But we have done the most difficult part, which has been to take a long, hard and honest look at our past mistakes."
"There is no easy way around this, but I am proud to say that we have been working hard to put things right," he said in a statement.
News Corp homed in on the split in the committee, saying its factual record was followed by "some commentary that we, and indeed several members of the committee, consider unjustified and highly partisan".
British media regulator Ofcom is investigating whether BSkyB -- 39 percent owned by NewsCorp - is a "fit and proper" owner of a broadcast license, which entails an examination of the company's officers and shareholders.
A top 10 investor in BSkyB, who declined to be named, noted the political row over the 'not fit' wording, which was clearly aimed at influencing the Ofcom decision.
Asked if the report would have any bearing on his stake, he said: "Not just yet but if it means he (Murdoch) has to sell eventually, then that might be quite interesting."
The scandal has already forced James Murdoch to sever almost all his ties with Britain, stepping down as chairman of BSkyB, although he still holds a directorship of the company.
"The suggestion that Rupert Murdoch is not fit to lead a major international company is an astonishing conclusion," commentator Roy Greenslade, who worked under Murdoch at the Sun and Sunday Times, told Reuters.
The revelations of widespread phone hacking for newspaper stories last summer wiped almost 20 percent off News Corp's value in one month and has reduced James Murdoch's chances of taking over his father's $50 billion media empire, which includes the Wall Street Journal, 20th Century Fox and pay-TV operations.
Shareholders of News Corp could use the report as an excuse to demand better corporate governance, but the Murdoch family controls around 40 percent of voting stock so Rupert is unlikely to come under any real pressure to change his leadership style.
"There are some large investors who like the assets but don't like how they're run," said David Joyce, an analyst at Miller Tabak, adding the report could be positive if it forced News Corp to improve its corporate governance.
The final version of the report was backed mainly by Labour members but also a member of the Liberal Democrats, junior partners in the governing coalition, in a blow to the Conservatives.
"None of us were able to support the report and we all voted against it," Conservative lawmaker Louise Mensch said, referring to her party members. "It will be correctly seen as a partisan report and we've lost a very great deal of its credibility."
Mensch said she would have supported the report if the reference to Rupert Murdoch being unfit to run a major international company had been removed.
"These people corrupted our country," Tom Watson, a Labour lawmaker and one of Murdoch's harshest critics on the committee said, referring to a police inquiry that has led to the arrests of journalists as well as police officers suspected of taking bribes.
The report said News Corp executives had shown contempt for the parliamentary system, singling out ex-News International chief Les Hinton, the paper's former top lawyer Tom Crone and the tabloid's last editor Colin Myler for having misled them.
James has also apologized for failing to get to the bottom of the scandal but said he was kept in the dark by staff at the paper. The committee said it did not have enough evidence to judge, but said Murdoch should have asked more questions.
"Their instinct throughout, until it was too late, was to cover up," the report said.
Yacktman Asset Management, a large shareholder in News Corp, said the British report did not change their view on the stock, while Barry Diller, who helped Murdoch build the Fox TV and studio business, said he was "more fit, morally and otherwise, to lead an organization than the majority of those that do".
BSkyB shares finished up 1.9 percent, slightly outperforming a 1.3 percent rise on the broad FTSE 100 index.
The lower house of parliament will meet at a later date to debate the report and vote on whether to accept the findings.
(Additional reporting by Paul Sandle, Avril Ormsby, Mohammed Abbas and Adrian Croft in London and Yinka Adegoke in New York; writing by Guy Faulconbridge; editing by Janet McBride and Philippa Fletcher)