Police in England and Northern Ireland have dropped a controversial investigation into journalists who made a documentary about a Troubles atrocity, following a public outcry and a stinging rebuke from judges.

The Durham constabulary and the Police Service of Northern Ireland (PSNI) announced on Monday night that they were no longer investigating Trevor Birney and Barry McCaffrey over their work on No Stone Unturned, a film about the murder of six Catholics in Loughinisland, County Down, in 1994.

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The journalists were immediately released from police bail and, on Tuesday can retrieve computers, files, phones and other material that had been seized.

The decision represented a victory for the journalists and press freedom campaigners and a humiliating climbdown for police, who will now face fresh pressure to find the Loughinisland murderers.

“The police have dropped the case for one reason only – finally, they accept that by arresting us and raiding our homes and offices, they were the ones that acted unlawfully,” Birney and McCaffrey said in a statement. “The PSNI put the cudgel in the hands of Durham constabulary and let them loose on us and on press freedom itself.”

The 2017 documentary, directed by the Oscar-winning director Alex Gibney, shone a light on a particularly dark event of the Troubles: the night Ulster Volunteer Force gunmen slaughtered customers in a pub watching a World Cup match. No one was charged. No Stone Unturned named the main suspects and questioned contacts between police and the alleged killers.

The police arrested Birney and McCaffrey in dawn raids last August on suspicion of stealing an unredacted police ombudsman investigation into the massacre.

The raids were overseen by officers from Durham constabulary after they were asked to take over the case by the PSNI due to a potential conflict of interest.

Birney and McCaffrey challenged the legality of the search warrants in a judicial review, leading to vindication in Belfast high court last week when Northern Ireland’s top judge quashed the warrants and rebuked police.

In a statement on Monday night Durham constabulary’s chief constable, Mike Barton, said the force had decided “not to progress” the investigation into Birney and McCaffrey. “At all times, my officers have acted in good faith, within the law and followed due process,” he said.

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George Hamilton, the PSNI chief constable, said he agreed with the decision and said police still hoped to find the murderers. He urged people with information to come forward. “The horror of what happened in Loughinisland has never been far from any of our thoughts. The perpetrators of that crime have never been brought to justice and that is a matter of huge regret for policing.”

In a statement to the Press Association, Birney and McCaffrey said their first thoughts were with the Loughinisland families. “The attack on us was an attack on them. We call on the PSNI and Durham to apologise to them for putting them through this unlawful charade.”

In response to the criticism levelled at the police by Birney and McCaffrey, a Public Prosecution Service spokeswoman said: “The conduct of investigations, including applying for and executing search warrants, is entirely a matter for police.”