Trusts which illegally retain organs may face criminal charges and fines following the report into Alder Hey Children's Hospital.
Health secretary Alan Milburn has ordered a police inquiry into what went wrong at Alder Hey and has promised to tighten laws on organ retention at post mortem following the report's publication on Tuesday.
Health organisations have given resounding support to plans to enshrine in law the need for informed consent to organ removal.
The report says that inadequate management at Alder Hey and Liverpool University allowed rogue pathologist Professor Dick van Velzen to flout the law and build up a vast collection of body parts.
Mr Milburn said Professor van Velzen had 'systematically ordered the unethical and illegal stripping of every organ from every child who had a post mortem'.
The report makes it clear that the then chief executive at Alder Hey Hospital, Hilary Rowland, failed to act on warnings about Professor van Velzen, including his failure to fulfil his clinical duty to provide histology reports, and missed clear opportunities to discipline him.
When the revelations about storing body parts first emerged she made misleading statements to the press that the policy of handling organs at Alder Hey did not differ from other hospitals.
An already horrific situation was made more painful for the dead children's relatives by the failure of the trust to properly manage the situation, the report says. 'There was a lack of proper management which resulted in the drip-feeding of information to parents and the provision of information which was frequently inaccurate. '
NHS Confederation policy director Nigel Edwards said: 'There is a tendency to try and judge the past by the standards of the present and that is difficult. It is easy to look back and say that is wrong. Ten to 12 years ago [chief executives] wouldn't have demanded to look at what pathologists were doing. '
Mr Edwards said there was also a potential problem with the extension of informed consent if it was extended to operations.
The report claims the pathologist's worst excesses could have been avoided had there been a better working relationship between the university and the hospital. The university is blamed for having refused to accept its responsibility in the matter, leaving the hospital to 'make a sequence of mistakes'.
A separate report by chief medical officer Professor Liam Donaldson makes it clear that the situation at Alder Hey, though extreme, may in some respects not be unique.
His census of trusts last year found a total of 54,300 organs, body parts, stillborn babies and foetuses held by pathology services at the end of 1999, dating back to 1970.
Of these, 25 trusts and medical schools - 12 per cent of the total - accounted for 80 per cent all the body parts held. Alder Hey held 6,900, Oxford Radcliffe 4,400, Great Ormond Street Children's Hospital 3,800, Royal Brompton & Harefield Hospitals 3,500, and Queen's Medical Centre Nottingham, a total of 2,700.
Professor Donaldson criticised trusts for a 'lack of respect for the dead' and called for a bereavement service to be established in every trust and the development of the standardised consent form for use across the entire NHS.