* Tapping of girl's phone was key point in hacking scandal
* Coulson says he knew nothing of illegal hacking
* Says he was "not interested in that kind of behaviour" (Adds new details throughout)
By Michael Holden and Kate Holton
LONDON, April 15 (Reuters) - Former Rupert Murdoch editor Andy Coulson told a London court on Tuesday he had not been involved in illegally tapping into the mobile phone messages of murdered British schoolgirl Milly Dowler, the incident that ignited Britain's phone-hacking scandal and sent shockwaves through the country's establishment.
Coulson, who later became Prime Minister David Cameron's media chief, said he had never engaged in illegal hacking activity, nor had known staff working for the News of the World Sunday tabloid had tapped into Dowler's messages.
The hacking of Dowler's phone forms a crucial part of the prosecution case against Coulson and Rebekah Brooks, the ex-boss of News Corp.'s British newspaper arm.
Both are on trial at the Old Bailey where they deny conspiracy to hack phones and authorising illegal payments when they worked as editors for Murdoch.
The revelation in July 2011 that Dowler's phone had been hacked while she was still missing sparked public outrage and a sequence of events leading to Murdoch closing the 168-year-old News of the World, the arrest of Coulson and Brooks, and Cameron ordering a public inquiry into press ethics.
Dowler, 13, vanished on her way back from school in March 2002 and her body was discovered some six months later.
The court has heard a private detective working for the News of the World hacked her voicemails in April that year when Brooks, then editor, was away on holiday and Coulson, her then deputy, was in charge.
In the witness box for the second day in the 5-1/2 month trial, Coulson was asked by his lawyer Timothy Langdale whether he was aware of "any activity by the News of the World in relation to the hacking of Milly Dowler's voicemail messages?"
"No, I was not," he said.
Asked if he had ever been "party to or in agreement with phone hacking at the News of the World?"
"No I was not," he answered.
One of the hacked voicemails on Dowler's phone was a message which had been mistakenly left by a recruitment agency. The jury were told that the paper sent a team of five reporters and two photographers to a town in central England to chase this lead.
Coulson said he was unaware of this, and later said he had not read a story which appeared in the following Sunday's paper which included details of the hacked call.
The prosecution have suggested that a decision to move the story from a prominent page-nine position to a spot further back in the paper and remove information from the hacked call followed discussions between Coulson and Brooks, who was in regular contact with the office from her holiday in Dubai.
The court has heard how the two were not only close colleagues but had also been having an affair.
"I don't remember having any conversation about Milly Dowler with Rebekah," said Coulson, adding the decision to move the story was probably to do with ensuring the paper had the right "mix" of serious and lighter stories.
"I don't think I rated this as a story," he said of the Dowler report, which suggested the messages could be the work of a hoaxer. "This is a hoax wrapped in a riddle."
When he first learned that the paper was following the suggestion Dowler had applied at a factory for a job, he said he thought the idea was ludicrous.
Coulson, who worked for Cameron from 2007 when he left the paper until resigning in January 2011, told the court that at the time he had no personal knowledge of phone-hacking and did not know it was a crime.
Asked what he would have thought about accessing voicemails to generate stories, Coulson said he would have thought it was intrusive, a breach of privacy and lazy journalism.
"Neither people I had worked for or myself as a reporter were interested in that kind of behaviour," he said.
The trial of Coulson, Brooks and five others, which is now in its 98th day, continues. (editing by Stephen Addison)