The paper will publish its last edition in 168 years on Sunday.
In a statement, Mr Murdoch said he was "convinced" the decision to shut the paper was "the right thing to do".
He declared: "Having consulted senior colleagues, I have decided that we must take further decisive action with respect to the paper. This Sunday will be the last issue of the News of the World."
Mr Murdoch said all profits from the paper's Sunday sale would be handed to good causes.
And he said all advertising space from the title would be given over to charities.
He added: "While we may never be able to make up for distress that has been caused, the right thing to do is for every penny of the circulation revenue we receive this weekend to go to organisations - many of whom are long-term friends and partners - that improve life in Britain and are devoted to treating others with dignity.
"We will run no commercial advertisements this weekend.
"Any advertising space in this last edition will be donated to causes and charities that wish to expose their good works to our millions of readers."
More than 200 staff at the News of the World were told of its closure by Rebekah Brooks, News International's CEO and the paper's former editor.
Decision ... Mr Murdoch and CEO Rebekah Brooks
It was also revealed last night that Andy Coulson, the former editor of the News of the World, will be arrested by appointment today over the scandal.
Mr Coulson was in charge between 2003 and 2007. He resigned as Mr Cameron's Director of Communications in January.
Had it covered ... 1901: Queen Victoria dies, Edward takes throne, 1936: George is new king after Ed's abdication, 1966: England win the World Cup at Wembley, 1963: Christine Keeler reveals Profumo scandal
He told staff: "I have important things to say about the News of the World and the steps we are taking to address the very serious problems that have occurred.
"It is only right that you as colleagues at News International are first to hear what I have to say and that you hear it directly from me.
Eighties ... 1982: Brit troops raid Argies' base in Falklands, 1984: prince 'affair' in first tabloid edition, 1986: downfall of Archer over tart bung, 1988: shocking drug confession of telly host
"That it is read by more people than any other English language newspaper. That it has enjoyed support from Britain's largest advertisers.
"And that it has a proud history of fighting crime, exposing wrong-doing and regularly setting the news agenda for the nation. When I tell people why I am proud to be part of News Corporation, I say that our commitment to journalism and a free Press is one of the things that sets us apart.
A way with words ... sub editor sifts stories
"The good things the News of the World does, however, have been sullied by behaviour that was wrong. Indeed, if recent allegations are true, it was inhuman and has no place in our company."
Sensational stories ... 1994: Queen's sister love notes are revealed, 1997: late edition reports Diana's death, 2000: paper leads Sarah's Law campaign, 2010: Pakistan game fix scandal rocks cricket
But he vowed to set new standards for the Press in future - and said "apologising and making amends" was "the right thing to do". Mr Murdoch added: "The News of the World is in the business of holding others to account. But it failed when it came to itself. In 2006, the police focused their investigations on two men.
Delivery ... rolls of paper head to presses
"Wrong-doers turned a good newsroom bad and this was not fully understood or adequately pursued. As a result, the News of the World and News International wrongly maintained that these issues were confined to one reporter.
New owner ... Rupert Murdoch has read
"The paper made statements to Parliament without being in the full possession of the facts. This was wrong."
Mr Murdoch said he "did not have a complete picture" when he sanctioned out-of-court settlements in the past to phone-hacking victims.
Newspaper base ... office site at Wapping
"Currently, there are two major and ongoing police investigations. We are co-operating fully and actively with both.
"This full co-operation will continue until the police's work is done.
"We have also admitted liability in civil cases. Already, we have settled a number of prominent cases and set up a Compensation Scheme."
Home ... Bouverie Street headquarters, London
He told how an outside law firm had been brought in to oversee the changes and said the company is doing its "utmost" to fix its mistakes.
The News of the World's staff are set to begin "appropriate consultations" about their jobs.
A cheap read ... ad for paper on carriage
"I can understand how unfair these decisions may feel. Particularly, for colleagues who will leave the company.
"You may see these changes as a price loyal staff at the News of the World are paying for the transgressions of others.
Exclusives ... paper's front page stories
News of the World editor Colin Myler - at the helm since January 2007 - said: "This is the saddest day of my professional career. For 168 years the News of the World has been a huge part of many people's lives.
"Sundays without this great British institution will not be the same."
The end after a proud history
By DAVID WILLETTS
THE News of the World was famed for jaw-dropping exclusives - honed over 168 years.
From the very first edition on October 1, 1843, it vowed to take on the big issues affecting the Great British Public.
Debut ... first front page in 1843
And it did so for just thruppence - far less than its rivals.
Exposes of the wrongdoings and philanderings of the rich and famous were soon being followed around the world.
By 1912 the paper had two million readers compared to the 12,000 who bought it in its first year. At the outbreak of World War Two circulation had doubled to four million - on the back of its slogan "all human life is there".
And by 1950 it was selling a colossal 8.5million copies.
When Rupert Murdoch took control in 1969 - beating rival publisher Robert Maxwell - it was his first Fleet Street paper.
Celebrated campaign triumphs had included the creation of the Employment of Children Act in 1903 which banned boys under 14 and girls under 16 from working.
More recently the News of the World famously campaigned for "Sarah's Law" - giving parents the right to know if convicted sex offenders are living in their area.
Other big exposes included confessions from Christine Keeler over the 1960s Profumo scandal, top Tory Jeffrey Archer paying off a vice girl and TV's Frank Bough taking drugs with hookers.
Many celebrated stings involved the paper's mystery investigative reporter Mazher Mahmood - dubbed the "fake sheikh".
Earlier this year the paper won scoop of the year at the British Press Awards for uncovering alleged match fixing involving Pakistan international cricketers.
And only last month the News of the World successfully forced the Government to have the Military Covenant enshrined in law - protecting the rights of every serviceman and woman in Britain.
4,000 victims
By DAVID WILLETTS
MORE than 4,000 possible victims of phone hacking by the News of the World have been identified by cops, it emerged yesterday.
Their names are among 11,000 pages of documents officers are going though as they investigate allegations that voicemail messages were illegally targeted.
Hundreds more people have come forward to say that their phones were accessed.
Metropolitan Police Deputy Assistant Commissioner Sue Akers pledged last night that the force would contact every potential victim "as soon as possible".
Hacker ... Glenn Mulcaire
She said: "I understand many people may be upset and will want to seek information from us.
"I ask them to be patient and reassure them we will contact them if they are affected. Have confidence in us to keep our promise but also realise it will take time."
Ms Akers, leading the Operation Weeting probe into the allegations, spoke out as new claims surfaced over the extent of the hacking carried out by the paper.
The decision to close the News of the World yesterday came after allegations that relatives of soldiers killed in Iraq and Afghanistan may have had their phones hacked.
Ms Akers, added: "I have huge sympathy for those who may have been the victims of phone hacking or intrusion into their private lives.
"It must be incredibly distressing to see details of the information held about them, or speculation about what may be held, in the media. This is forcing them to relive devastating experiences."
Their parents 'were targets' ... murdered ten-year-old Soham schoolgirls Holly Wells and Jessica Chapman
Rupert Murdoch, Chairman and Chief Executive Officer of The Sun's owner News Corporation, has called the hacking allegations "deplorable and unacceptable".
The Royal British Legion - which had successfully campaigned with the News of the World to have the Military Covenant enshrined in law - cut all ties with the paper over the claims about its hacking of the phones of dead soldiers' families.
Mobile numbers of relatives of fallen heroes were said to have been discovered among papers belonging to disgraced private investigator Glenn Mulcaire.
It followed allegations that families of 7/7 bombing victims were targeted and the parents of murdered schoolgirls Holly Wells and Jessica Chapman.
And that came on the heels of outrage this week at claims that murdered teenager Milly Dowler's phone had been hacked.
In a statement, the Royal British Legion said: "We can't with any conscience campaign alongside the News of the World on behalf of Armed Forces families while it stands accused of preying on these same families in the lowest depths of their misery.
Tragic victim ... Milly mobile is said to have been hacked
"The hacking allegations have shocked us to the core."
Phone hacking was first uncovered in 2006, when detectives arrested the News of the World's royal editor Clive Goodman and Mulcaire.
Goodman was jailed for four months and Mulcaire for six months in 2007 after they admitted intercepting voicemails of members of the royal household - including some by Prince William.
The editor at the time, Andy Coulson, resigned and later became PM David Cameron's director of communications. But in January he resigned after it was alleged he knew phones were being hacked.
In the same month, Operation Weeting was launched after News International released fresh paper work.
In April News of the World executive Ian Edmondson and chief reporter Neville Thurlbeck were arrested on suspicion of conspiring to intercept voicemail messages.
Target ... claims the families of 7/7 victims were on the list
The crisis deepened on Wednesday when Mr Cameron announced a public inquiry would be launched into the scandal - and said another inquiry might take place into police handling of the original flawed hacking investigation. He told MPs: "It is absolutely disgusting what has taken place."
A Downing Street spokesman said yesterday: "What matters is that all wrongdoing is exposed and those responsible for these appalling acts are brought to justice.
"As the Prime Minister has made clear, he is committed to establishing rigorous public inquiries to make sure this never happens in our country again."
Tory MP Nick Boles said of the decision to close the News of the World: "This is an important mark that the company understands the depth of feeling in the country. We need to remember that it has always been clear that this behaviour is not confined either to the News of the World or to News International.
Coulson ... editor who quit over paper's hacking shame
"There are strong suggestions that many other newspapers have indulged in the same sort of behaviour and done the same sorts of deals with some dodgy policeman.
"I think there is more to come to clean up this industry and the capital's police."
Ex-London mayor Ken Livingstone claimed that his phone had been hacked by reporters on the Daily Mail or the Mail on Sunday.
Mr Livingstone said: "My phone has been hacked into and there's a court case arising from that. This is the start of a tsunami of revelations about illegality."
5-year trail to end of the paper
THIS is how events leading to the closure of the News of the World unfolded over five years.
2006 August 8: Royal editor Clive Goodman and private investigator Glenn Mulcaire are arrested over the hacking of royal aides' phones.
2007 January 26: Goodman jailed for four months and Mulcaire for six months. Editor Andy Coulson resigns, taking "ultimate responsibility".
May 31: Then-opposition leader David Cameron makes Coulson the Conservatives' director of communications and planning.
Jail ... Goodman's arrest triggered scandal
2009 July 21: Coulson tells MPs things went "badly wrong" under his editorship but he knew nothing of phone hacking.
2010 May 11: Coulson becomes head of new coalition Government's media operation.
September 5: New York Times claims Coulson did know of hacking - raising questions about Scotland Yard's probe into the case.
2011 January 21: Coulson quits No10, saying that the drip-drip of eavesdropping claims is making his job impossible.
January 26: Scotland Yard launches Operation Weeting to probe "significant new information" from News of the World publisher News International.
Assistant editor (news) Ian Edmondson is sacked. He is linked to the scandal in documents about legal action by actress Sienna Miller.
April 5: Detectives arrest Edmondson and chief reporter Neville Thurlbeck on suspicion of conspiring to intercept communications. They are later bailed.
April 8: News International admits liability and apologises to a number of public figures.
April 14: Senior reporter James Weatherup is questioned in new police inquiry.
June 21: Football pundit Andy Gray accepts £20,000 damages after his voicemail was intercepted. Sienna Miller is paid £100,000.
July 4: Claims emerge that murdered schoolgirl Milly Dowler's mobile phone was hacked into after she went missing.
July 5: News International Chief Executive Rebekah Brooks says the allegations are appalling.
July 6: David Cameron announces a public inquiry. Reports emerge that relatives of soldiers killed in action may have had phones hacked.
July 7: James Murdoch, Deputy Chief Operating Officer of the newspaper's owners News Corporation, tells the staff that this Sunday's edition of the News of the World will be the last.
