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Newspapers and politicians clash over press rules

Rosie Hallam | Getty Images

The first British state press regulation rules in over 300 years will be hammered out this week after the U.K. government rejected a proposal from newspapers to regulate themselves, but analysts are warning that the legislation could accelerate print's decline.

Britain's culture minister, Maria Miller, told the House of Commons that the newspaper industry's proposals did not meet the "fundamental principles" of the recommendations of a judicial inquiry into the practices of the U.K. press. The investigation, chaired by Lord Justice Leveson, was called after it was revealed that journalists had hacked into the mobile phones of celebrities and members of the public.

Cross-party talks are set to take place to flesh out an "improved" version of rules that agreed by the main political parties in March ahead of a deadline of this Friday. The agreement, made without the involvement of the U.K. newspapers, involves the setting up of a Royal Charter to oversee the press.

But analysts warn that press regulations enshrined in law could make newspapers think twice about printing a story and ultimately affect their readership.

(Read more: Tony Blair: press regulation is straightforward)

"Whereas in the past they would have felt confident of doing so (printing a story), now they may feel more hesitant because of the regulations, and therefore that may affect circulation and therefore weed into advertising as well," Ian Whittaker, equity researcher at Liberum Capital, told CNBC.

"The only thing that this will essentially do is probably add to the acceleration of print's decline."

Press opposition

The government is facing strong opposition from the press such as the Daily Mail and Rupert Murdoch's newspapers over several elements of the cross-party charter. Newspapers are flirting with the idea of a legal challenge in a European court if the laws go through.

The industry is unhappy about the potential for them to be forced to sign up to the new law. The cross-party charter also says that the new regulator must provide a free arbitration scheme to resolve reader complaints. But newspapers fear this will lead to time-consuming and aggravated claims.

Analysts said the regulations have a "massive gaping hole" as they do not show ways to regulate the internet.

(Read more: Murdoch's News Corp. promises 'relentless' cost cuts)

"The big change now is the growth of online news sources, and online blogs and online opinion. And under the current regulations, and the regulations that have been put forward, quite frankly there is a massive gaping hole there in how you regulate those sites," Whittaker told CNBC.

"The problem that I always find with regulators in the newspaper industry is they are so far behind what is actually happening at the moment, it is almost comical."

The deal reached this week between the political parties will go to the Privy Council for approval on October 30. But risks still remain that the press will not sign up to the politicians' proposed new body.

—By CNBC's Arjun Kharpal: Follow him on Twitter @ArjunKharpal