© ReutersBBC director general George Entwistle resigned after failing to get to grips with a child sex abuse scandal
Entwistle has faced widespread criticism since a rival broadcaster carried charges last month that a former BBC star, the late Jimmy Savile, was one of Britain's most prolific sex offenders.
"I have decided that the honourable thing to do is to step down," Entwistle said in a televised statement on Saturday outside the BBC's London headquarters.
Earlier in the day, Britain's public broadcaster suspended all investigations by its current affairs programme newsnight following the report that Entwistle had condemned as "fundamentally wrong".
Newsnight was already under scrutiny for dropping an investigation last year into abuse claims against the late Savile, one of the BBC's biggest stars who has now been accused of sexually abusing hundreds of children over four decades.
Last week, Newsnight broadcast an interview with a man, Steve Messham, who claimed he was repeatedly abused by a senior Conservative Party figure from the 1980s when he was a teenager living in the Bryn Estyn children's home in Wales.
Although the programme did not identify the politician, it sparked a frenzy of speculation leading to former Tory party treasurer Alistair McAlpine, an aide to Margaret Thatcher, being widely named on social networking sites.
McAlpine went public on Friday to strongly deny the allegations, and hours later Messham retracted his claims, saying he had only just seen a picture of the former politician and he was not the man who abused him.
Messham offered his "sincere and humble" apologies to McAlpine and suggested in a statement on Friday that it was the police who wrongly identified the politician as his alleged abuser back in the early 1990s.
"We should not have put out a film that was so fundamentally wrong," the BBC director general said on Saturday. "What happened here is completely unacceptable. In my view the film should not have gone out."
Entwistle said he had not been aware of the programme until after it was broadcast, but said it had been signed off by lawyers and senior management.
He confirmed that he had suspended all Newsnight investigations and had asked for a review into what had happened to be on his desk by Sunday. "Further action will follow from that, disciplinary if necessary," he told BBC radio.
Entwistle added that it would be "absolutely disproportionate" to consider closing down the 32-year-old programme, which he himself edited a decade ago, citing its reputation for hard-hitting investigative journalism.
But he admitted the damage the row had caused the corporation in the wake of the Savile scandal, which is currently the focus of three BBC-commissioned inquiries and a major police investigation.
"This is a bad crisis of trust," said Entwistle, who only took over as director general in September.
After the Newsnight report, Prime Minister David Cameron ordered an urgent review of a 2000 investigation into abuse at the Welsh children's home.
He refused to comment on the latest developments on Saturday, but his culture minister, Maria Miller, called on the BBC's governing body, the BBC Trust, to move swiftly to establish what happened.
"The events of the last few days only serve to underline the vital importance of restoring credibility," she said.
John Whittingdale, the chairman of parliament's media committee, added: "This has done immense damage to the reputation of the BBC.... Somebody needs to take responsibility for this."
Lawyers for McAlpine meanwhile said they would be pursuing legal action against "all media who have defamed Lord McAlpine's reputation and published defamatory statements".
The politician, who blasted the claims as "wholly false and seriously defamatory", said he was forced to publicly deny them after he was named directly on the Internet and "by innuendo" in the print and broadcast media.
He said he had never been to any children's home, let alone the Bryn Estyn facility in Wrexham, north Wales. "I did not sexually abuse Mr Messham or any other residents of the children's home in Wrexham," he said in a statement.
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