* Prosecution failed to find "smoking gun" -Brooks lawyer
* PM's former media chief found guilty over hacking
* Cameron apologises for hiring Andy Coulson
* Murdoch's UK newspaper arm says has changed its ways
* Scandal shocked Britain's political elite (Adds Breakingviews link)
By Michael Holden and Kate Holton
LONDON, June 24 (Reuters) - Rebekah Brooks, the former boss of Rupert Murdoch's British newspaper arm, was acquitted on Tuesday of orchestrating a campaign to hack into phones and bribe officials in a case that has shaken the British political establishment.
A jury at London's Old Bailey court cleared Brooks unanimously but found Andy Coulson - her former lover and Prime Minister David Cameron's ex-media chief - guilty of conspiring to intercept messages to break news about royalty, celebrities and victims of crime.
The conviction in one of the most expensive criminal trials in British legal history forced Cameron to apologise for hiring Coulson in 2007 when the Conservative leader gave him a "second chance" after he had already quit one of Murdoch's newspapers as the hacking scandal brewed.
"I'm extremely sorry that I employed him, it was the wrong decision," said the British leader. "I asked him questions about if he knew about phone hacking and he said that he didn't and I accepted those assurances and I gave him the job."
The jury is still considering its verdict on charges that Coulson also sanctioned illegal payments to public officials to generate lurid exclusives for the News of the World, which was Britain's biggest selling title until the scandal forced its closure.
The eight women and three men, who have been deliberating over eight days already, will return on Wednesday.
On hearing the verdict read out by the jury's foreman in Court Number 12, Brooks looked stunned and drew a sharp intake of breath. Visibly shaking, she was led away by a nurse. Coulson, who faces jail, was impassive.
Brooks, known for her distinctive long red hair, walked from the court through a scrum of photographers, smiling faintly and clutching the hand of her husband, Charlie, who was also cleared of attempting to hinder the police investigation.
Several court staff waved goodbye to Brooks, called Murdoch's "fifth daughter" by British media because she was so close to the media tycoon.
Brooks's lawyer Jonathan Laidlaw had argued the prosecution failed to produce a "smoking gun" during her 14 days of intense questioning on the stand. He likened the authorities' decision to take her to court to a mediaeval witch hunt.
Both Coulson and Brooks were former editors of the News of the World, the 168-year-old tabloid Murdoch closed in July 2011 amid a public outcry over revelations that journalists had hacked into the voicemails of hundreds of people including murdered schoolgirl Milly Dowler.
The scandal shocked Britain's political elite, with prime ministers from both main parties shown to have been close to Murdoch and his senior staff including Brooks.
It also rocked Murdoch's $86 billion media empire, prompting politicians who had long courted the tycoon's approval to turn on him. Cameron ordered a public inquiry into press ethics in the immediate aftermath.
The 46-year-old Brooks, who was a close friend of the last three British prime ministers, faced questions during her time on the stand about her private life, her career and her ties to top politicians.
"If what you saw was a mask, Mrs Brooks must be a witch with truly supernatural powers," her lawyer told the jury. "No human mask could withstand that amount of scrutiny without cracking."
Brooks was cleared of being part of a conspiracy to hack into phones to find exclusive stories, of authorising illegal payments to public officials and of trying to hinder the police investigation.
The long-running scandal has been seized on by Cameron's critics, who accuse him of showing poor judgment in his close ties to Brooks and for recruiting Coulson when he was in opposition.
Coulson was brought in to help Cameron, who was educated at Eton, Britain's most prestigious fee-paying school, to connect with voters and stayed with him when the Conservative leader became prime minister in 2010.
After Cameron's apology, opposition Labour leader Ed Miliband went on the attack.
"This isn't just a serious error of judgement. This taints David Cameron's government because we now know that he put his relationship with Rupert Murdoch ahead of doing the right thing when it came to Andy Coulson," he said.
The scandal began to emerge in November 2006 when the News of the World's former royal editor Clive Goodman and its private detective Glenn Mulcaire admitted hacking the phones of aides to the royal family.
For years, News International insisted the crime was limited to a single rogue reporter and aggressively rejected any suggestions otherwise.
Two legal sources close to the case said the verdicts reduced the chance that the U.S. Justice Department would be able to take any kind of action against Murdoch's News Corp under the Foreign and Corrupt Practices Act, a law which bans U.S. companies from bribing foreign officials.
Following the initial verdicts, Murdoch's British newspaper operation said it had changed the way it did business.
"We said long ago, and repeat today, that wrongdoing occurred, and we apologised for it. We have been paying compensation to those affected and have cooperated with investigations," a News UK spokesman said.
Police now believe there were probably more than 1,000 victims of hacking, including Queen Elizabeth's grandsons, Princes William and Harry, and William's wife Kate, and possibly as many as 5,500.
Politicians, celebrities, prominent sporting figures and even rival journalists were all targeted in a desperate attempt to find exclusive stories for Britain's top-selling newspaper.
But Laidlaw said only 12 confirmed hackings occurred during Brooks's time as editor from 2000-3, and she had been on holiday when Dowler's phone was tapped in 2002. Coulson, her deputy, was in charge that week. He had denied any knowledge.
The prosecution argued that the two editors must have known about the activity on the paper, after four senior editors and a reporter pleaded guilty to phone hacking.
"DO HIS PHONE"
Dan Evans, an ex-reporter who has pleaded guilty to hacking under Coulson's editorship, said the practice was so rampant that even the office cat knew about it. "We didn't have an office cat," Coulson retorted from the witness box.
One email shown to the jury revealed how Coulson instructed a news editor working on a story about a celebrity figure "to do his phone".
However, the most dramatic revelation during the trial, which began last October, was that Brooks and Coulson had had an on/off affair running over nine years from when they began working together on the News of the World in 1998.
Prosecutors had argued that this meant Brooks would have known all about the hacking that Coulson was involved in, while she said that they maintained a professional "Chinese wall".
The prosecution also alleged Brooks and her husband were part of an elaborate plot to hide evidence and computers from detectives.
However, Charlie Brooks said in court he had merely been hiding a briefcase from police which contained his collection of lesbian pornography and a novel he was working on.
The maximum jail term for phone hacking is two years.
(Editing by Guy Faulconbridge and David Stamp)
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