The Legion's campaign on the military covenant was backed by the News of the World It said it was also reviewing its advertising with the paper's owner, News International, which also publishes the Sun and The Times.
News International said it would be "appalled" if the claims were true.
The Daily Telegraph reports that the phone numbers of relatives of service personnel killed in Iraq and Afghanistan were found in the files of private investigator Glenn Mulcaire, who had been working for the News of the World.
The Royal British Legion campaigned with the News of the World on Military Covenant issues and was set to mount another initiative with the paper to save the Chief Coroner's Office from abolition.
The charity's adverts have also appeared in the Sun and on the Sun's Forces Channel online to promote its welfare services for serving and former military personnel and their relatives.
A spokesman for the charity said: "We can't with any conscience campaign alongside 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."
He added: "Clearly, it would make a mockery of that campaign to go hand-in-hand with News of the World. We think we'll do better without them."
Under oath The latest claims against the UK's biggest-selling newspaper come as Prime Minister David Cameron consults about the nature of the public inquiry into the phone-hacking claims.
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Lord Dannatt told the BBC the claims were "shocking, it's appalling, it's beyond terrible"
Government sources say the prime minister has "an open mind" about whether the probe should follow such a path.
But Deputy Prime Minister Nick Clegg and Labour leader Ed Miliband - who has said he was "disgusted" by latest allegations - are both understood to favour such a set-up.
The latest stories come after reports claimed the paper hacked into the mobile phone of murdered schoolgirl Milly Dowler, the families of 7/7 bombing victims and the parents of murdered Soham schoolgirls Holly Wells and Jessica Chapman.
Police have not approached relatives of the soldiers but some families say a newspaper has contacted them suggesting they were victims of phone-hacking.
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 and was making efforts to verify the information.
The former head of the Army, Lord Dannatt, told BBC Radio 4's Today the latest claims were "appalling".
"It is really touching the sensitivity of families who have been through a tremendous amount - then to suddenly find what they thought was a closed issue after the death, the knock on the door, the repatriation and inquest, then suddenly gets opened again in this horrible way," he said.
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