The prime minister, David Cameron, makes a statement in the House of Commons on collusion between British security forces and loyalist terrorists ITN

David Cameron has apologised to the family of the murdered Belfast lawyer Pat Finucane and agreed that there was state collusion between police officers and soldiers and his loyalist killers.

Launching the De Silva report into one of the most divisive murders of the Northern Ireland Troubles, the prime minister said there were "shocking levels of collusion" in the killing. Cameron told the House of Commons that the depth of the co-operation between the security forces and Finucane's loyalist killers was "unacceptable".

Addressing parliament, Cameron said that "on the balance of probability", an officer or officers from the Royal Ulster Constabulary (RUC) did propose Finucane as a target to loyalist terrorists.

He did, however, deny there was any overarching conspiracy to use loyalists to target members of the nationalist community or active republicans.

However, Finucane's widow, Geraldine, was scathing about the report, describing it as a "sham … a whitewash … a confidence trick. Most insulting of all, this report is not the truth."

"Yet another British government has engineered the suppression of the truth about the murder of my husband, Pat Finucane," she told a press conference.

The prime minister admitted that the report made for "extremely difficult reading" in regard to Sir Desmond de Silva's findings, such as the revelation that 80% of the Ulster Defence Association's intelligence information came from official state sources.

The UDA was responsible for shooting Finucane dead in front of his family at their north Belfast home in February 1989. His family and human rights campaigners have insisted over the past 23 years that there was collaboration between the UDA in west and north Belfast and members of the security forces.

The De Silva report concluded that British army agent handlers "deliberately" helped loyalist gunmen select their targets in Northern Ireland in the 1980s.

But ministers may have been unaware that Finucane was being lined up for assassination, De Silva said.

The legal supervision of agents in paramilitary gangs was nonetheless woefully inadequate and the high-level ignorance was possibly intentional, his report said.

"There was a wilful and abject failure by successive governments to provide the clear policy and legal framework necessary for agent-handling operations to take place effectively within the law," he said.

"The system appears to have facilitated political deniability in relation to such operations, rather than creating mechanisms for an appropriate level of political oversight."

Those who directed and took part in the murder of Finucane were mainly agents and informers working for the army's Force Research Unit (FRU).

De Silva's report shows the RUC was aware of two previous plans to kill Finucane earlier in the 1980s but did not notify him of the threat.

"Notwithstanding the apparent seriousness of the threat to Finucane's life," the report says, "the decision was taken by RUC special branch, supported by the Irish Joint Section (of MI5 and MI6), to take no action to warn or otherwise protect him because to do so could compromise an agent from whom the intelligence derived."

It adds, in reference to another solicitor suspected of having links to paramilitaries: "Steps were often not taken to secure the protection of those who were considered to be a thorn in the side of the security forces during this period of the Troubles."

Addressing the Finucane family, who were in London for the report's launch, the prime minister said he was "deeply sorry" in relation to the scandal. However, he tried to exonerate the former Tory cabinet minister Douglas Hogg over comments he made prior to the Finucane murder in which Hogg said some solicitors in Northern Ireland were unduly sympathetic to the IRA.

The prime minister insisted that Hogg made his remark because of briefings he had received back then. The comments Hogg made were not intended to encourage people to attack Finucane, according to De Silva, Cameron added.

Amnesty International, however, said the De Silva review had failed the Finucane family and had not delivered them justice.

Patrick Corrigan, Amnesty's director in Northern Ireland, said: "The Finucanes, and indeed the public, have been fobbed off with a 'review of the paperwork' – which reneges on repeated commitments by the British government and falls short of the UK's obligations under international law.

"It is unacceptable and Amnesty, his family and the public should not settle for anything other than the full and independent investigation that this case, and Patrick Finucane's memory, warrants. The state has accepted that there was collusion in Patrick Finucane's killing. Those responsible must be held accountable."

The prime minister said he "respectfully disagreed" with the Finucane family over their demand for a full, independent public inquiry and cited the cost of the Bloody Sunday tribunal as one reason for opposing it.

He also accepted that RUC special branch was "responsible for seriously obstructing the investigation".

One of the security force whistleblowers in the Finucane case, the ex-military intelligence officer Ian Hurst, who belonged to a secretive army unit running agents inside the UDA, said there was little chance of either police or military handlers or their loyalist informers facing the courts. He has faced charges of breaching the Official Secrets Act for leaking information about the role of army intelligence in running agents within the UDA who committed crimes including the targeting of Finucane.

He said he backed "100%" the Finucanes' demand for a full, independent inquiry.

"They should be entitled to the whole truth, not a version of it," the ex-intelligence officer added.

In his speech to the Commons, the prime minister said that both RUC special branch and the army group Hurst once belonged to, the FRU, had advance notice of assassinations the UDA was planning but took no action.

One of the agents who was centrally involved in the Finucane murder plot was Brian Nelson, the UDA's so-called intelligence officer at the time. FRU officers provided Nelson with intelligence files on IRA and republican suspects, which the former soldier then passed on to his UDA colleagues.

On the army's role, Cameron told MPs that the military and Ministry of Defence officials provided ministers with "misleading and in parts factually inaccurate advice about the Force Research Unit's handling of Nelson".

Nelson was certainly not alone in terms of informants working inside the UDA. At least 29 members of the UDA in north and west Belfast were informers for at least one or more security force agencies at the time Finucane was shot dead.

Intriguingly, the prime minister during his speech admitted that the attorney general in John Major's government was under "considerable political pressure to ensure Nelson was not prosecuted". Cameron said Sir Patrick Mayhew deserved credit for resisting these demands to protect the agent inside the UDA.

Opposition politicians also expressed their dismay over the Finucane scandal and De Silva's findings. Sir Menzies Campbell, the former Liberal Democrat leader, said he had never heard a statement in the Commons that filled him with more "revulsion" than the prime minister's address.