Bob Dowler, 59, broke down in tears in the witness box after sad notes written by Milly, in which she said she was unhappy, were read to him.
He had told police, who informed him he was a suspect whether he liked it or not, that the teenager had discovered a bondage magazine in his bedroom.
But he denied having anything to do with the 13-year-old’s disappearance.
Double killer Levi Bellfield was later arrested but denies killing Milly.
Bellfield, 42, denies abducting and murdering Milly and attempting to kidnap Rachel Cowles, aged 11, in March 2002.
Milly disappeared “in the blink of an eye” after leaving Walton-on-Thames station, Surrey, and beginning her walk home along Station Avenue.
The prosecution says Bellfield was living yards away and murdered Milly in his flat before dumping the body.
Her remains were found six months later in woods 25 miles away.
Bellfield, a former wheelclamper and bouncer, was convicted in 2008 of murdering Marsha McDonnell, 19, Amelie Delagrange, 22, and attempting to murder Kate Sheedy, 18.
The emotional evidence came from Bob Dowler, an IT consultant, after Jeffrey Samuels QC, defending, began his cross-examination.
Samuels asked: “After the aftermath of her disappearance and in the early part of the police inquiry, is it right that you became the focus of police inquiries?”
Dowler replied: “That is correct.”
He had considered this to be a waste of time. He said: “I was very concerned because I knew if they focused on me, they need to be focused on someone else.”
Samuels: “They were suggesting you had something to do with your daughter’s disappearance?”
Dowler: I do believe that was the case.”
Samuels suggested Milly had not been the “happy-go-lucky-character’ she had been made out to be but had her own “demons’.
Dowler replied: “She had her natural childhood fears.”
It was then Samuels read out a poem and letter found in Milly’s bedroom and Dowler sobbed.
The words read to the court included: “All they do is slag me off and force everyone else against me.”
It went on to say: “I am not pretty or fit, what do they have that I haven’t? Let’s face it, I am just totally shit.”
Her sister had been “pretty and intelligent”. Milly said she hated school.
A second document read: “Dear daddy and my beautiful mummy, by the time you find this letter I will be gone. It would be best for you to try to forget me. I will always love you.
“I am sorry but lots of love, your little disappointment.”
Dowler sobbed: “It is very distressing.”
Asked what impact the magazines would have had on Milly, Dowler said: “she would have become most distressed.”
The trial continues.