British prime minister David Cameron's former communications chief Andy Coulson has been bailed until October police said, after being arrested over allegations of phone hacking while he was editor of the News of the World newspaper.

"A man aged 43 who was arrested by appointment at a south London police station today has been bailed to a date in October," a metropolitan police spokesman said, in response to a question about Mr Coulson.

Mr Coulson, who edited the weekly paper from 2003 to 2007, was arrested on suspicion of conspiring to intercept communications and suspicion of corruption.

Asked if he was being made a scapegoat for the hacking scandal, Mr Coulson told reporters: "I'm afraid I can't say any more at this stage. There's a lot I'd like to say, but I can't."

The paper's former royal editor, Clive Goodman, who was jailed in January 2007 over the scandal, was rearrested today in connection with alleged payments to police.

Mr Cameron said this morning he will establish two formal inquiries into the phone hacking scandal that forced the closure of the News of the World.

Yesterday, News International chairman James Murdoch stunned the Sunday tabloid newspaper’s 200 staff in Wapping and 32 staff in Dublin by telling them the paper would close after this weekend’s edition.

Mr Murdoch, the son of media baron Rupert Murdoch, pulled the plug on the 168-year-old paper after claims that it paid private investigators to illegally intercept the voicemail messages of murdered schoolgirl Milly Dowler, bereaved military families and relatives of 7/7 bombing victims. It is also accused of paying thousands of pounds illegally to corrupt police officers.

Mr Cameron told a hastily convened news conference at Downing Street this morning that a judge would be appointed to run an independent inquiry into how the scandal was allowed to happen. “No stone will be left unturned,” he said.

Mr Cameron said a second inquiry would be held to examine the ethics and culture of the press and said that the Press Complaints Commission had failed. “I believe we need a new system entirely,” he said.

Mr Coulson (43) quit as Mr Cameron's communications chief earlier this year after the allegations resurfaced. He has denied any knowledge of the practice during his four years running the newspaper but took responsibility for what happened during his tenure.

Downing Street is clearly concerned about the damage the affair is doing to Mr Cameron’s reputation. His judgment has come under fire for hiring Mr Coulson, as well as for his friendship with Rebekah Brooks, his predecessor in the editor's chair and now a close Murdoch confidante who is defying calls to resign from his company.

At his press conference this morning, Mr Cameron defended said the decision to hire Mr Coulson, saying it was “mine and mine alone”.

Mr Cameron said he had been given "assurances" by Mr Coulson when taking him on as his communications chief that he knew nothing about the hacking at the News of the World. It had not yet been proved whether those assurances were false, he said.

“I took a conscious choice to give someone who had screwed up a second chance," he said. "He worked for me, he worked for me well, but actually he decided in the end the second chance wouldn’t work, he had to resign all over again for the first offence.”

Mr Cameron intensified pressure on Ms Brooks, who was editor of the News of the World at the time of the phone hacking. Referring to reports that she had offered her resignation, he said: "In this situation, I would have taken it."

He said the bulk of the first inquiry, which would also cover other newspapers and the failure of the first Scotland Yard investigation into phone hacking, could not be carried out until after the new police investigation was complete. But he said a second inquiry would begin immediately into the culture, ethics and practices of the British press.

“Police investigations can only get you so far,” he told the press conference. “What people really want to know is what happened and how it was allowed to happen.

Mr Cameron called for a new system of press regulation in the wake of the closure of the News of the World. This new system of regulation will strike the balance between an individuals' right to privacy and what is in the public interest, he said.

Yesterday's dramatic decision to shut the newspaper was taken in an attempt to ensure that the widening scandal does not threaten the complete takeover by News Corp, owned by Rupert Murdoch, of satellite broadcaster BSkyB. Mr Cameron said his government had to follow proper legal procedures when deciding on the takeover of BSkyB and the decision would take "some time".

Staff at the News of the World were in tears after Mr Murdoch jnr told them of the decision to close the title, which had lost more than 30 major advertisers in recent days and faced a campaign to get readers to boycott it. Saying that many of the paper's staff had not worked there during the hacking scandal when "egregious behaviour occurred", Mr Murdoch said: "You may see these changes as a price loyal staff at the News of the World are paying for the transgressions of others."

The New of the World's Irish edition employs 22 full-time staff and 10 others on a part-time basis. Latest figures from the Audit Bureau of Circulation show it had a circulation of 113,463 in May. This was the highest sale achieved by a British newspaper in this market and would place it third overall behind the Sunday Independent and the Sunday World, both of which are published by Independent News & Media.

Despite the loss of the title, it is rumoured News International may be planning remain in the Sunday "red-top" tabloid market by transforming the Sun into a seven-day paper.

The Murdochs are standing by Ms Brooks, who is now News International’s chief executive. She may yet face criminal prosecution given evidence that police were bribed during her time in charge of the title. Documents sent by News International to the Metropolitan Police show that five officers received £100,000 in return for information.