Officers at all levels of the probe knew an allegation of hacking had been made against the News of the World but did nothing despite suggestions a crime had been committed, said the Independent Police Complaints Commission (IPCC).
But the watchdog added it had not been able to discover why nothing was done, saying senior officers appeared to be suffering from a “form of collective amnesia”.
The findings follow an investigation into the conduct of two senior officers, deputy chief constable Craig Denholm and temporary detective superintendent Maria Woodall.
Surrey Police said it had taken “management action and issued words of advice” to both officers, although the IPCC concluded neither had a case to answer for misconduct.
IPCC deputy chairwoman Deborah Glass 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.
“Our investigation has heard from officers and former officers from Surrey Police who have expressed surprise and dismay that it wasn’t investigated. 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.”
Former nightclub bouncer Levi Bellfield was convicted of Milly’s murder in Jun 2011, nine years after the teenager vanished as she walked home from school after leaving a train station.
Following Bellfield’s trial, the then Surrey Police chief constable, Mark Rowley, set up Operation Baronet to look into reports that Surrey Police was aware in Apr 2002 that the News of the World had allegedly intercepted Milly’s voicemail.
Surrey Police Authority and Surrey Police referred complaints against Mr Denholm and Ms Woodall to the IPCC in Jun 2012 in light of evidence arising from Operation Baronet.
Surrey Police said it had taken action and issued advice to Mr Denholm in relation to failing to assess material sent to him referring to phone hacking.
And it has done the same for Ms Woodall, in relation to failing to make the connection between convictions of News of the World royal editor Clive Goodman and private investigator Glenn Mulcaire for phone hacking in 2007 and the events of 2002.
The now defunct News of the World admitted hacking Milly’s mobile phone but it remains unknown whether two missing messages were deleted deliberately, as previously suggested, or were removed from her message box automatically.
The Leveson Inquiry into press standards heard Milly’s mother Sally phoned her daughter repeatedly in Mar 2002 after she vanished.
Milly’s voicemail message was a generic automated response when her message box was full, but when a message had been deleted it reverted to her personal greeting. The Dowlers told the inquiry they were given “false hope” by hearing the change of greeting — thinking their daughter might still be alive and had wiped a message.
Attempting to find an explanation, the IPCC said that in 2002 Surrey Police was focused on finding Milly rather than on the illegal hacking activities of the News of the World.