I need some help/advice and here is my long story short....

I have been working in my current company for 7 ++ years and found another job which pays better and better job scope. Tendered my resignation to my manager and they are very sad to see me go however understand that it was needed for me as there isn't much career progression for me already in the team.

While serving my 2 months notice, there was another internal job for another department which I was interested and is 1 grade above my current grade. Was told by my awesome colleagues to give that new internal job posting a go and see if they can pay me more and get 1 grade higher if I were to stay back, after all there is no harm in trying right? So I decided to give it new internal job posting a go while I still have 1 more month to serve left. Even spoke with the hiring manager about my interest and told him my current situation that I have resigned and if he wants to try me out, he and his team have to be fast in the interviews. Have gone through 3 initial interviews will multiple folks, and now I am at the final interview where they will probably talk if I really want to proceed with this internal role and what kind of package will I get by joining his team.

Now the questions I want to ask is:

1) If I do accept the internal job posting, is it "legally" okay to call up the other company that offered me to join earlier and tell them "sorry can my current company gave me another role and I will not be joining you all in 2 weeks time" ? I've been reading online a little and some said so long you do not turn up on your first day of work at new place, you are not employed with them yet.
2) Will the other company take legal action against me as I have already so called "signed" the offer letter that I will join them?

My manager is a very cool guy and he can retract my resignation letter anytime so long I am still employed with him, but he will only do it if the other internal department confirm wants me. Also the last interview with the internal hiring manager and from me joining the other new company is just 2 weeks gap! If I do get to the point where I do want to stay at my current company but joining another department instead, I really might consider (provided they can match my new salary at a minimum and give me 1 grade higher). If that happens, probably I will be black listed from joining that other company forever.

What are your thoughts? I've never really been in this situation before in my 18 years career. The real question I really want to know is, is it legally okay to reject the new company offer even if I already sign all that I accepted the offer!