The Royal British Legion has dropped the News of the World as its campaigning partner after allegations that the paper hacked the phones of bereaved military families.
The charity said it had been "shocked to the core" by claims that a private investigator working for the tabloid illegally intercepted the voicemails of relatives of troops killed in Iraq and Afghanistan.
It announced that it had suspended all relations with the News of the World and was reviewing its advertising budget with News International, which also publishes The Sun and The Times.
A Royal British Legion spokesman 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. The hacking allegations have shocked us to the core."
The legion has previously worked with the paper to call for the military covenant, which promises fair treatment for those who fight for their country, to be enshrined in law.
The latest allegations came after Prime Minister David Cameron ordered a public inquiry into the scandal and Rupert Murdoch described phone hacking at the News of the World as "deplorable and unacceptable".
News International said it would be "absolutely appalled and horrified" if there was any truth to the claims that bereaved military families' phones were hacked.
A spokesman for the MoD, which is understood to be working closely with Scotland Yard on the issue, said: "This is a matter for the Metropolitan Police who are investigating these allegations. It would be inappropriate for us to comment whilst this investigation is ongoing."
Meanwhile, Commons leader Sir George Young told MPs the Government is to urgently review its advertising contracts with the News of the World
Speaking in the House of Commons, Sir George said he would "raise the matter urgently" with the Cabinet Office following the decision by a number of private companies to cut their advertising with the newspaper.