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The Daily Telegraph claims the phone numbers of relatives of dead service personnel were found in the files of private investigator Glenn Mulcaire.
This comes after Prime Minister David Cameron said he would set up a public inquiry into alleged phone hacking.
Rupert Murdoch, the paper's owner, has called claims of hacking "deplorable".
News International said it would be "absolutely appalled and horrified" if there was any truth in the allegations relating to families of dead soldiers and it would be immediately contacting the Ministry of Defence.
A spokesman for the company said: "News International's record as a friend of the armed services and of our servicemen and servicewomen, is impeccable.
"Our titles have campaigned in support of the military over many years and will continue to do so. If these allegations are true we are absolutely appalled and horrified. We will be contacting the MoD immediately to try and verify the situation."
'Disgusted'
Rose Gentle, the mother of fusilier Gordon Gentle, who was killed by a roadside bomb in Basra in 2004, told the BBC she was "totally disgusted" by the "shocking" allegations.
She said there was a "lot of anger" among families and many were left wondering if their names were on a list of people whose phones were hacked.
"The police should be contacting families straight away and putting them out of their misery.
"I'd never buy that paper again, if this is true, they need to be brought to justice for this, they need to pay for this," she said.
MPH Solicitors - whose clients include Samantha Roberts, widow of one of the first Britons killed in Iraq in 2003 - said the firm was contacted by media on Wednesday morning about possible phone-hacking.
"We are making efforts to verify this information," a statement said.
Col Richard Kemp, former commander of British forces in Afghanistan, told the BBC when he heard about the allegations he was "absolutely speechless with anger".
"If these allegations are true the thing that makes it most shocking is that this newspaper, the News of the World, and its sister paper the Sun, have been so incredibly staunch in their support for British soldiers and British forces," he said.
Conservative MP Patrick Mercer, who served in Northern Ireland in the British Army, told the BBC the accusations were "very damaging" and would add to families' devastation of losing a loved one.
"The idea that the death of their son or whatever is going to be the subject of a sordid investigation by journalists, who are at the end of the day hoping to make monetary profit out of it, is deeply unpalatable and will only add to the grief," he said.
An MoD spokesman 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."
'Deplorable and unacceptable'
Earlier, Mr Murdoch, the chairman of News Corporation, News International's parent company, commented on allegations of phone hacking at the News of the World.
He said: "Recent allegations of phone hacking and making payments to police with respect to the News of the World are deplorable and unacceptable."
In a statement, he added: "I have made clear that our company must fully and proactively co-operate with the police in all investigations and that is exactly what News International has been doing and will continue to do under Rebekah Brooks's leadership.
"We are committed to addressing these issues fully and have taken a number of important steps to prevent them from happening again."
Meanwhile, Scotland Yard has told George Osborne that his name and home phone number appeared on notes kept by Mulcaire and former News of the World reporter Clive Goodman, a spokesman for the chancellor said.
He said there was no suggestion that his phone had been hacked.
The prime minister has expressed disgust at claims that the voicemail of murdered girl Milly Dowler was hacked, and some messages deleted.
Source: BBC
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DISCLAIMER: The Views, Comments, Opinions, Contributions and Statements made by Readers and Contributors on this platform do not necessarily represent the views or policy of Multimedia Group Limited.
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