The Metropolitan police's investigation into claims a VIP paedophile ring was operating from an upmarket housing development near Parliament was "riddled with errors".
The report, written by retired judge Sir Richard Henriques, identifies 43 failings within Operation Midland.
It criticises officers and says they misled a judge to get a search warrant.
The main allegations came from a source known only as 'Nick' and although the report does not name him, it does say a complainant will now be investigated for perverting the course of justice.
Operation Midland was launched in 2014 to look into claims that a group of VIPs had sexually abused and killed children during the 1970s and 80s.
Nick's claims led to allegations against public figures, including the former military chief Lord Bramall, the former home secretary Leon Brittan, and the former Tory MP Harvey Proctor.
But in March this year the investigation, which racked up £2.5million, was wound up after detectives accepted there was insufficient evidence to make any arrests.
The report criticises officers for believing Nick's claims without testing his recollections.
Five officers, including a deputy assistant commissioner, are now to be referred to the Independent Police Complaints Commission.
Sir Bernard Hogan-Howe has issued a statement saying he accepts there had been "serious failings" and the investigation should have been closed sooner.