* Staff angry after arrests of journalists

By Kate Holton

LONDON, Feb 17 (Reuters) - Rupert Murdoch vowed to launch a Sunday edition of his scandal-hit Sun tabloid on Friday in a bid to win over angry staff mounting one of the biggest challenges to his more than 40 years as a proprietor in Britain.

Murdoch was in London to reassure employees after the company supplied information to police which led to the arrest of some of the most senior journalists on the paper in an investigation into illegal payments to public officials.

In a typically bullish move, the 80-year-old said that News Corp would soon launch a Sun on Sunday to replace the News of the World, which was abruptly shut last year after an inquiry into telephone hacking to generate stories.

"I've worked alongside you for 43 years to build The Sun into one of the world's finest papers," Australian-born Murdoch said in an email to staff.

"My continuing respect makes this situation a source of great pain for me, as I know it is for each of you".

Murdoch later visited the newsroom floor of the Sun with his eldest son Lachlan, prompting speculation about what that meant for son James, who had been seen as heir apparent at News Corp before the hacking scandal blew up.

A source familiar with the situation played down the significance of the appearance, saying James had been busy and wanted Lachlan at what was likely to be a difficult meeting.

The latest arrests sparked the most bitter row within News Corp's British newspaper arm since a radical overhaul of print unions sparked violent clashes in the 1980s.

Coming on the back of the closure of his 168-year-old News of the World, the latest row prompted many to consider whether Murdoch would quit British media altogether.

"UNWAVERING SUPPORT"

"I am staying with you all, in London, for the next several weeks to give you my unwavering support," Murdoch said. "I am confident we will get through this together."

Murdoch bought the Sun in 1969 and swiftly turned it into a sensationalist daily tabloid, renowned for political clout, campaigns, entertainment stories, sex scandals, banner headlines and topless "Page 3" girls.

But executives at his corporate headquarters in New York, who watched in dismay last year as the phone hacking scandal dragged down the company's reputation and share price, do not share his love of newspapers.

A secretive Management and Standards Committee (MSC) set up by Murdoch has handed information to police after trawling through 300 million emails, expense accounts and notebooks in the hunt for signs of criminality.

Murdoch said the committee would continue to work with the police and illegal activity would not be tolerated. But he said those journalists who had been arrested would have their suspensions lifted and could return to work.

"Finally some good news," one member of staff said. Another described the fact that the arrested Sun employees could return to work as "heart-warming".

Many staff feel they have been hung out to dry after competing fiercely for years to break news and keep the Sun ahead of its rivals.

"You were under immense pressure to get a story," one former Sun journalist told Reuters on condition of anonymity. "You go to bed thinking: what am I going to bring in tomorrow? You had the news editors bellowing down the phone."

CIVIL WAR

Staff on the Sun have spoken in the last week about a "civil war" breaking out at the company, with many consulting lawyers.

"We will obey the law," Murdoch said.

"Illegal activities simply cannot and will not be tolerated - at any of our publications. We will turn over every piece of evidence we find - not just because we are obligated to but because it is the right thing to do."

The MSC was designed to show, particularly in the United States, that the group was doing all it could to cooperate and to detoxify its assets.

Andrew Neil, a Murdoch editor for 11 years on the Sunday Times, said the row had weakened Murdoch in Britain and the once all-powerful owner appeared to have effectively lost control.

"He has put in place things he cannot stop," Neil told Reuters.

"He's doing what he had to do to save his corporation in the U.S. but he's losing the trust of his UK journalists in the process."

Trevor Kavanagh, the Sun's associate editor once seen as unfailingly loyal to Murdoch, toured broadcast studios earlier this week to lambast the company and the heavy-handedness of police who detained the staff in dawn raids last weekend.

• A Permanent Economic Emergency