Three of the country's biggest newspaper groups, including the owners of the Daily Mail and the Sun, are threatening to boycott the government and set up their own regulatory body if the Conservatives yield to Labour demands for the statutory underpinning of a new press watchdog.
As parliament prepared for a knife-edge vote on press reforms on Monday, the culture secretary, Maria Miller, declared hopes of reaching a deal which would avoid a humiliating Tory defeat. But the publishers have warned that it will be a hollow victory if the political compromise is a new law.
Sources say "active discussions" between Daily Mail owner Associated Newspapers, the Telegraph Media Group and News International have been held in the past week about launching their own successor to the Press Complaints Commission amid warnings from some industry figures that a Leveson law, as proposed in Lord Justice Leveson's report on the press, would take the country back 300 years to a time when newspapers were licensed.
"We wouldn't join the regulator. It would challenge the government to go for full state licensing," said a source. "This is definitely under active consideration: to stand up against the politicians and for the media and say 'we'll go it alone and what are you going to do about it?' They will just end up fighting for years and newspapers might rediscover a common purpose around press freedom and become a beacon of liberty. This is definitely a fallback position."
The Guardian, the Financial Times and the Independent, which broke ranks with other newspaper groups earlier this month in an attempt to end the deadlock over press regulation, are not believed to be party to the discussions about a boycott.
The prospect of a breakaway regulator will infuriate the pressure group Hacked Off, which has been fighting a determined campaign for a Leveson law on behalf of victims of press intrusion.
The author JK Rowling pleaded on Sunday with Labour and the Liberal Democrats to vote for statutory underpinning: "I believed David Cameron when he said that he would implement Leveson's recommendations 'unless they were bonkers'. I did not see how he could back away, with honour, from words so bold and unequivocal. Well, he has backed away, and I am one among many who feel they have been hung out to dry.
"Monday's vote will make history one way or another; I am merely one among many turning their eyes towards Ed Miliband and Nick Clegg and hoping that they have the courage to do what Cameron promised, but which he failed to deliver."
There is nothing in last November's Leveson report to stop newspapers setting up their own system. He recommended "an independent self-regulatory body". However, this was coupled with the threat of punitive or exemplary damages for breaches of privacy or defamation to be imposed on any publisher who did not opt in to be subject to the regulator's rules. They would also have to foot claimants' legal costs even where a newspaper was found not guilty of committing an offence.
But the three dissenting groups, which have deep pockets and determined proprietors, are prepared to do battle, reflecting the strength of their opposition to statutory underpinning and to the influence of Hacked Off.
The Labour party has been accused of cynically supporting Hacked Off's campaign to force through a statutory basis for press regulation by hijacking government legislation including the defamation bill and the enterprise and regulatory reform bill.
Harriet Harman, the party's deputy leader, has said that Labour is working "very closely" with Hacked Off but is not "the political wing of Hugh Grant".
Newspapers involved in the talks know they are playing hardball on the eve of key vote, but it is not the first time they have warned that any threat of a Leveson law would entangle the government in messy legal battles for years.
Lord Black, the Tory peer and executive director of the Telegraph Media Group, has been a key player behind the scenes. During the Leveson inquiry, he warned that the rulings of a new press adjudicator would be constantly challenged in law if it was underpinned by statute.
Much may depend on what constitutes a "statutory underpinning" and the spin put on any deal by the parties, who have been locked a war of words over Leveson for three months.
The prime minister has said a press law would be "crossing the Rubicon" but it is understood that a "dab of statute" which would underpin a royal charter and ban the privy council from amending any charter would be acceptable to Associated, News International and the Telegraph.
John Whittingdale, the chairman of the culture, media and sport select committee, said he was opposed to any legislation but a "dab of statute" could be a price worth paying for the "greater prize" of a robust regulator.
On a knife-edge
If the Tories, Labour and Lib Dems fail to reach agreement on press reform, a series of knife-edge votes will be held in both houses of parliament on Monday.
What are they voting on?
The first vote in the Commons will be on the prime minister's amendment to the crime and courts bill to allow exemplary damages to be imposed on media organisations that do not sign up to a new press regulator. Labour and the Lib Dems support exemplary damages but believe the prime minister's system is too lenient for media organisations that sign up to the new body. The second major vote in the Commons will be on the Labour and Lib Dem plans to ensure the royal charter on press regulation complies with the Leveson recommendations.
Peers are also expected to vote. Labour's Lord Stevenson of Balmacara will table an amendment to the enterprise and regulatory reform bill to place the royal charter on a statutory footing. Lord Skidelsky, a crossbench peer, and Lady Kennedy of the Shaws, a supporter of Hacked Off, will table separate amendments to enshrine the main Leveson recommendations in law.
How do the votes stack up?
On paper, David Cameron will lose because he has the support of only 305 MPs (304 Tories plus Nadine Dorries, who was deprived of the whip), while the Lib Dems and Labour have 314 MPs plus the support of some minor parties.
What happens next?
If the three main party leaders reach agreement, a royal charter will be established with cross-party consensus. If they fail, then it will all be down to the votes. If Cameron loses, he says he will respect the will of parliament. This would mean that the royal charter could be set up without the support of the largest party.
Nicholas Watt
Where they stand
Statutory underpinning
Labour/Liberal Democrats
Royal Charter needs to be enshrined in a statute to ensure that any changes to the recognition system are agreed by majority of MPs, not just ministers of the day.
Conservatives
Tory charter states that a parliamentary majority would be required to make amendments but critics say say ministers could change it.
Independence
Labour/Lib Dems
The press should not be able to veto appointments. Independence from press and politicians crucial. Rules out MPs or party-affiliated peers from any role.
Tories
Amends Leveson to reflect press concerns that the appointments panel might appoint people of whom the press disapprove. Gives press effective veto of "independent" members of regulator.
Code committee
Labour/Lib Dems
Accept the press's wish for the code committee (with journalistic majority) to write the code, but says the board must approve it. Journalists as well as editors to write code. Appointed by Appointments Panel, not industry.
Tories
Gives the regulator's board the final power of adopting the Code.
Apologies & corrections
Labour/Lib Dems
The Regulator can "direct" these apologies and corrections. A stronger and more detailed power.
Tories
The Regulator can "require" apologies and corrections, upsetting the press which wanted to avoid mandatory apologies.
Group complaints
Labour/Lib Dems
Deletes the word "substantial" allowing for merely a public interest test for whether the Board can take group complaints. Could open the door to lots more complaints.
Tories
The Regulator should hear complaints from affected groups where there is a "substantial" public interest. This accepts the press argument that a high bar is needed to avoid endless lobby groups targeting the regulator.
Arbitral arm
Labour/Lib Dems
Recognises the industry's concerns – and particularly the regional press's perilous financial state – by saying the recognition body must keep an ongoing watch on the financial sustainability of this scheme. Conservatives had planned do this once only after two years.
Tories
Should be free for members of the public to use. This worries the press, who fear a flood of complainants seeking compensation without a small financial hurdle to weed out frivolous claims.
Recognition panel role
Labour/Lib Dems
Goes further by requiring the recognition panel to report annually on whether there is a recognised regulator, whether a significant publisher has not joined the system and whether any of the recognition criteria have been substantially breached.
Tories
To conduct cyclical reviews and to report on the first anniversary as to whether a regulator has applied to be recognised.
