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Prime Minister David Cameron said today that his former head of communications Andy Coulson should be prosecuted if it is proved that he lied when he claimed to know nothing about phone-hacking at the News of the World while he was editor.

In fiery exchanges at Prime Minister's Question Time, Mr Cameron called for 'root and branch change' at News International. He said those responsible for the 'disgraceful' hacking into private phone calls should be prosecuted.

Labour leader Ed Miliband called for former News of the World editor Rebekah Brooks to be removed from her current position as News International chief executive, branding her continued employment by the company an 'insult' to the family of murdered teenager Milly Dowler, whose family were watching from the public gallery.

As the pair traded blows across the Commons floor, News International's legal manager of 26 years, John Crone, announced his resignation from the post.

His resignation came just minutes before David Cameron announced to the House of Commons that a full judicial inquiry would be led by Lord Justice Leveson, who would have the power to compel witnesses to give evidence under oath.

Mr Miliband called on the Prime Minister to apologise for his 'catastrophic error in judgment' in appointing Mr Coulson as director of communications at 10 Downing Street.

Mr Cameron told the House: 'All these questions relate to the fact that I hired a tabloid editor. I did so on the basis of assurances he gave me that he did not know about the phone-hacking, he was not involved in criminality.

'He gave those self-same assurances to the police, to a select committee of this House and under oath to a court of law.

'If it turns out he lied, it won't just be that he shouldn't have been in government, it will be that he should be prosecuted.'

Mr Cameron disclosed that his office had not passed on warnings from senior figures on the Guardian newspaper over Mr Coulson's links with private investigator Jonathan Rees. But he insisted that it did not contain any new information.

'This was not some secret stash of information - almost all of it was published in the Guardian in February 2010 at the same time my office was approached,' he said.

'It contained no allegations directly linking Andy Coulson to illegal behaviour, it didn't shed any further light on the issue of phone-hacking, so it wasn't drawn to my attention by my office.'

He added: 'There is a firestorm that is engulfing parts of the media, parts of the police and indeed our political system's ability to respond.

'What we must do in the coming days and weeks is think above all of the victims - like the Dowler family, who are watching this today - to make doubly sure that we get to the bottom of this and that we prosecute those who are responsible.'

The Prime Minister indicated that he believes the allegations against the News of the World should have repercussions for its parent company News International and for News Corporation's bid to buy the shares in satellite broadcaster BSkyB which it does not already own.

'There needs to be root-and-branch change in this entire organisation,' said Mr Cameron.

'It is becoming increasingly clear that while everybody to start with wanted somehow to separate what was happening at News International and what is happening at BSkyB, that is simply not possible.

'What has happened at this company is disgraceful. It has got to be addressed at every level. They should stop thinking about mergers when they have got to sort out the mess they have created.'

As the debate came to a climax, PMQs descended to the level of pantomime, with MPs making so much noise that speaker John Bercow's calls for order were drowned out and he eventually gave up, before waiting for silence to reprimand members.