The family of murdered Walton school girl Milly Dowler could receive a record-breaking £2m legal settlement following the News International phone hacking scandal.

It is understood the compensation includes £1m for a charity of the Dowler family’s choosing.

Allegations that the 13-year-old’s phone was hacked after she was murdered in 2002 led to public outcry.

Her parents Sally and Bob, as well as sister Gemma were cruelly given false hope when they were told the Heathside School pupil’s voicemails had been listened to and deleted after her disappearance.

The revelations also led to the closure of the News of the World and the resignation of News International’s chief executive Rebekah Brooks, who described the allegations as abhorrent when they surfaced.

She faced fierce public grilling by the Commons culture, media and sport committee, as have Rupert and James Murdoch in relation to their knowledge of the phone hacking.

When questioned by MPs in July, she said: “My instant reaction was shock and disgust that a family that had already suffered so much - this allegation clearly added to that suffering.”

Australian media tycoon Rupert Murdoch personally met the Dowler family that month, after the story about phone hacking broke.

The News Corporation chairman was witnessed holding his head in his hands and repeatedly telling the family that he was “very, very sorry”.

The Dowler family formed charity Milly’s Fund after her death, but it was wound down in 2005 and merged with the Suzy Lamplugh Trust, which her parents had worked closely with.

It was unclear which charity would receive the sum.

It was also unclear of the exact amount of the final settlement, with reports suggesting the family were pushing for a total of £3.5m, but either way it will be above and beyond any previous phone hacking settlement.

The Dowler’s lawyer Mark Lewis said: “I am not in a position to comment at this time, save to echo the official statement from News International that we are at an advances stage of negotiations.

“The family have been through a terrible ordeal, made worse by the revelations of phone hacking of the News of the World, and this is a welcome signal of remorse from News Corporation.

“It would have been more welcome still had it not come almost a decade after the original incident and only as a result of the exposure of phone hacking through dogged journalism (not by News International), and despite what appeared to be a lengthy attempted cover-up by News Corporation.

“We also wait to hear about the nature of the settlement with the other alleged 4,000 victims of phone hacking identified by Operation Weeting, most of whom are yet to discover that they were targeted.”