Relatives of murdered British schoolgirl Milly Dowler are in settlement talks with News International.

The media giant confirmed it was in discussions with family members amid claims that it had tabled a compensation offer worth more than £2 million.

Sources close to relatives said an agreement had not yet been reached and a donation to charity would feature as part of any deal.

Police claims that the teenager's voicemails were illegally intercepted by a private investigator working for the News of the World after she went missing in 2002 triggered a string of damaging revelations that led to the closure of the Sunday tabloid in July.

Payout negotiations were going on as family lawyer Mark Lewis said the phone-hacking scandal has distracted from the main role of the press to hold politicians to account.

Mr Lewis said the "most sinister abuses of democracy" included cases where newspapers had withheld information to obtain a commercial advantage.

Speaking at the Liberal Democrat conference in Birmingham, he said Government proposals to cut no-win, no-fee cases would have meant Milly Dowler's family could never have brought their case.

It is alleged that Milly's voicemail was accessed on behalf of the News of the World while she was missing, and that messages were deleted to make room for more recordings. This gave the family false hope that she was still alive.