Independent Police Complaints Commission finds police knew of phone hacking, but nothing was done for almost a decade

Craig Denholm, now deputy chief constable of Surrey police, who will receive words of advice – the lowest form of sanction. Photograph: Chris Young/PA

Senior officers at Surrey police were "afflicted by a form of collective amnesia" about the force's failure to investigate the alleged hacking of Milly Dowler's phone by a newspaper in 2002, an Independent Police Complaints Commission report has found.

The revelation of the hacking of the murdered teenager's phone by the News of the World led to revulsion that triggered the tabloid's closure. The IPCC found that there was knowledge of the alleged hacking "at all levels" of the Surrey police team investigating the case, and that its head, Craig Denholm, even received documents mentioning it. But nothing was done for almost a decade, even after the 2007 conviction of a journalist from the paper for hacking the royal family and a private investigator for carrying it out.

But the IPCC said they could not find evidence to disprove the assertion by Denholm, now deputy chief constable of Surrey, that he did not know and did not make the "relevant connections".

Thus he will not face any disciplinary charge but Surrey announced he will receive words of advice, the lowest form of sanction. He is eligible to retire soon, by 2014, on a pension estimated at over £80,000 a year.

Denholm was the senior investigating officer in the Milly Dowler case and then held the rank of detective chief superintendent. The investigation, called Operation Ruby, was launched after Dowler went missing in 2002. She was later found murdered.

The IPCC investigation examined whether Denholm was aware during Operation Ruby that the News of the World had accessed the teenager's voicemail in 2002, and, if so, what he did after he found out.

Deborah Glass, the IPCC deputy chair, said: "We will never know what would have happened had Surrey police carried out an investigation into the hacking of Milly Dowler's phone in 2002.

"Phone hacking was a crime and this should have been acted upon, if not in 2002, then later, once the News of the World's widespread use of phone hacking became a matter of public knowledge and concern."

Glass added: "We have not been able to uncover any evidence, in documentation or witness statements, of why and by whom that decision was made: former senior officers, in particular, appear to have been afflicted by a form of collective amnesia in relation to the events of 2002. This is perhaps not surprising, given the events of 2011 and the public outcry that the hacking of Milly Dowler's phone produced.

"However, it is scarcely credible that no one connected to the Milly Dowler investigation recognised the relevance and importance of the information Surrey police held in 2002 before this was disclosed by Operation Weeting."

The IPCC said that in 2002 the force's focus was finding the missing girl. It noted claims from within the force of an "unhealthy relationship" with the media. The IPCC said this was to "keep the media onside".

A second more junior detective, Maria Woodall, will also not face any discipline charge, but will receive words of advice.

Denholm later worked in Scotland Yard's counter-terrorism unit under the then assistant commissioner John Yates. He left a month before Yates announced that the phone-hacking inquiry would not be reopened after the Guardian revealed there were potentially thousands of victims.

In a statement, Surrey police said Denholm would receive "words of advice in relation to not assessing some of the material sent to him referring to phone hacking".

Chief Constable Lynne Owens said: "Surrey police acknowledged in 2011 that the hacking of Milly Dowler's voicemails should have been investigated and both the former chief constable and I have met with and apologised to the Dowler family for the distress this has caused."

Owens, tipped by some as a possible first female commissioner of the Met, added: "As the IPCC commissioner has acknowledged, at the time Surrey police became aware of phone hacking, the focus of the investigation team was on finding Milly Dowler and then bringing her killer to justice.

"This was the largest and most high-profile murder investigation in the country at the time and remains the largest inquiry ever undertaken by Surrey police. It was right that Milly was the primary focus of the investigation but the matter of phone hacking should have been revisited at a later stage."

Levi Bellfield, a former bouncer, was given a whole-life sentence in June 2011 after being found guilty of abducting and killing the 13-year-old.

It has been alleged that Denholm was aware the News of the World had illegally accessed information from the missing girl's phone following a meeting with two reporters from the Sunday newspaper in 2002.

Surrey police and the police authority referred his conduct to the IPCC on 21 June this year and the police watchdog announced it would carry out an independent investigation.

The Dowler family said the interference with Milly's voicemail gave them false hope she was still alive.

The IPCC's full report has not being published for legal reasons connected to criminal trials to do with hacking.