The decision to drop Newsnight's report into Jimmy Savile's decades long campaign of sexual abuse was "flawed" and plunged the BBC into "chaos and confusion", according to a review carried out by former Sky News executive Nick Pollard.
The document, released on Wednesday, paints a picture of a top-down organisation with rivalries and faction fighting.
It said the BBC's management system "proved completely incapable of dealing" with the issues raised by the axing of the story and "the level of chaos and confusion was even greater than was apparent at the time".
In the wake of the report, which cost taxpayers £2m, deputy director of BBC News Stephen Mitchell has resigned from his position.
Slogans painted on the cottage owned by Jimmy Savile in Glencoe, Scotland.
It also revealed how Jeremy Paxman warned then editor of Newsnight Peter Rippon the blog that he had published defending the decision to drop the story "doesn’t answer all of the accusations laid against us" within an hour of it being published.
Speaking on Wednesday as he unveiled the report, Pollard said Newsnight's report into Savile led to one of the "worst management crises" in the corporation. "Newsnight's inquiry into Jimmy Savile last year started a chain of events that was to prove eventually disastrous for the BBC."
He said there were "serious problems" with Newsnight with "organisational" and elements of "personal difficulty" between individuals.
The report found: "The decision to drop the original investigation was flawed and the way it was taken was wrong but I believe it was done in good faith. It was not done to protect the Savile tribute programmes or for any improper reason."
The report was published at the same time as another review, by the BBC Trust, concluded that airing a Newsnight report that led to Lord McAlpine being wrongly named as a paedophile had resulted largely from a failure by members of the team to follow the BBC's own editorial guidelines.
Among the senior figures criticised in the Pollard report are former Director General George Entwistle and director of news Helen Boaden.
The review blamed in part an "apparent adherence to rigid management chains" for the failure to deal with the issue.
It said Ms Boaden's attempt to alert Mr Entwistle to potential problems posed by the story during an industry lunch was "too casual" and she is criticised for not taking "greater responsibility" as the crisis grew.
Mr Entwistle, who resigned after 54 days in the top job, was criticised for appearing to "have taken a long time to take any real control" of the problems at the BBC.
The review concludes that the BBC does not have to be taken down "brick by brick" but said the Director General's role as editor-in-chief needs to be examined.
It also said it "raises a question about the insularity of some people within the BBC" who are described as being unaware of wider industry practices.
In response, the BBC has said Newsnight will get a new Editor and Deputy Editor and added that incoming Director General, Tony Hall, will be asked to reform its "management culture".
Also criticised was the Deputy Director of BBC News, Stephen Mitchell, who decided to remove the Savile investigation from the corporation's Managed Risk Programmes List (MRPL) - an internal mechanism to flag up stories that contain some element of potential danger including risk to the BBC's reputation.
Pollard described that decision as "critical", adding: "It was important to establish why he had done this. Very unfortunately, he could offer no convincing reason".
Pollard said that if it had stayed on the MRPL some of what followed "might well have been avoided".
The report also paints an unflattering picture of relations between staff on Newsnight and in the wider BBC, saying the decision to cancel the story led to disagreements between show boss Peter Rippon and his journalists and "relationships... began to break down".
It found there was no "undue pressure" on Mr Rippon from his bosses to drop the story, but said his decision to do so "was seriously flawed".
It went on: "he made a bad mistake in not examining the evidence properly".
It also describes the background to his blog post on the issue, which was later corrected after being found to be factually incorrect, as "chaotic".
The evidence given to the review also reveals Mr Entwistle refused to speak to Newsnight reporter Meirion Jones off-the-record because he "didn't trust him to have an off-the-record conversation".
It also includes evidence from Ms Boaden that Mr Entwistle told her he would not accept her resignation and was going to make a public statement that would make "it impossible for Peter [Rippon] not to resign".
The report includes sections of an email sent to Mr Entwistle two years before becoming Director-General, telling him an obituary for Savile had not been done because of "the darker side" to his life though Mr Entwistle told the inquiry he had not read it.
The review said the email, and others like it, indicates "there was knowledge, not just rumour ... about the unsavoury side of Savile's character" in BBC TV shortly after his death.
Culture Secretary Maria Miller, said: “I am pleased that the BBC Trust have acted quickly to publish Nick Pollard's review. The report raises serious questions around editorial and management issues at the BBC and I look to the Trust to help tackle these.
“I also remind the Trust how vital it is to publish all relevant evidence, as soon as possible, in order to re-build public trust and confidence in the BBC.
"It remains critical that we do not lose sight of the most important issue in this - the many victims of sexual abuse by Savile. I urge the BBC to now focus on the review into those abuses, and ensure it is swift and transparent. I will remain in close touch with the Trust as they oversee this work."