In a statement, News Corp announced that it no longer intends to make a bid to acquire the 61% of Sky that it does not already own.
Chase Carey, the deputy chairman, president and chief operating officer of News Corp, said: "We believed that the proposed acquisition of Sky by News Corporation would benefit both companies but it has become clear that it is too difficult to progress in this climate.
"News Corporation remains a committed long-term shareholder in Sky. We are proud of the success it has achieved and our contribution to it."
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The move follows a motion put forward by the Labour Party today urging Murdoch to drop his £8bn bid for Sky in the wake of the phone hacking scandal. The motion was poised to gain cross-party support, heaping pressure on News Corp.
The Labour leader Ed Miliband described the move as "a victory for people up and down this country who have been appalled by the revelations of the phone hacking scandal and the failure of News International to take responsibility".
Speaking to BBC News, shadow culture secretary Ivan Lewis added: "It's a victory for the public of this country, it's a victory for parliament and it's a victory for the tremendous leadership that Ed Miliband has shown."
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Sky's share price dropped briefly by around 4% on today's trading following the announcement, but then recovered. The share price has slumped by around 20% over the past week and is now trading at around the same level as when News Corp lodged its first bid for the shares over a year ago.
This latest development follows an announcement that Murdoch, his son James and News International chief executive Rebekah Brooks have been invited to appear in front of the culture, media and sport committee next week. The "polite request" is purely voluntary and there has been no indication if they will attend.