Professional boundaries "became blurred" at Scotland Yard as the force made "imprudent decisions" and showed "poor judgment" in hiring a former News of the World boss as a PR consultant, the police watchdog said on Thursday.
The Independent Police Complaints Commission ruled out corruption allegations in the decision to give Neil Wallis a £1,000-a-day job with the Metropolitan Police.
The investigation also dismissed claims of misconduct surrounding former assistant commissioner John Yates' alleged involvement in securing a job at the force for Mr Wallis' daughter.
But the two investigations showed "senior people appear to have been oblivious to the perception of conflict" amid the phone hacking scandal, Deborah Glass, the watchdog's deputy chairwoman, said.
Senior figures at the force were to blame for failing to carry out a vetting check on Mr Wallis "prior to, or during, his employment" for communications advice between October 2009 and September 2010, the report said.
Mr Wallis was arrested and bailed last year as part of the force's investigation into phone-hacking.
Ms Glass expressed concern over the resignation last month of former Metropolitan Police communications chief Dick Fedorcio, who was told he had a case to answer over the procurement of the contract.
Ms Glass added: "The IPCC cannot prevent a member of police staff leaving before facing misconduct proceedings. But I can and do observe that such a practice can be hugely damaging to public confidence."
Mr Yates, who quit the force during the peak of the scandal last summer, showed "poor judgment" in forwarding Amy Wallis' CV to Scotland Yard's head of HR.
The action had "the foreseeable consequence that human resources staff believed that they were obliged to find a post", the report said.
Ms Glass said: "In these investigations, at the heart of the issues affecting public confidence was the question of whether two separate arrangements - both involving a form of employment connected to Neil Wallis - were either
corruptly entered into or otherwise breached MPS policies and procedures.
"In neither case did we find evidence of corruption, but in both cases we found that policies were breached, and in the case of the former Director of Public Affairs, Dick Fedorcio, that there was a case to answer in relation to misconduct.
"Our investigations were limited in scope to the issues over which we have responsibility. However, the findings should be considered in context.
"Despite the growing phone hacking scandal, which must have exercised the MPS at a senior level and which was beginning to damage the reputation of the Metropolitan Police in late 2009, senior people appear to have been oblivious to the perception of conflict.
"It is clear to me that professional boundaries became blurred, imprudent decisions taken and poor judgment shown by senior police personnel.
"I am acutely aware that both reports are being published against the backdrop of the Leveson Inquiry, which is examining the relationship between the police and the media.
"The ongoing inquiry is painting an uncomfortable picture of the relationship between the biggest police force in Britain and sections of the media.
"This culture has had an impact on public confidence, although I also observe that since these cases were referred, none of the senior personnel referred to in these reports are still serving."
Mr Wallis, whose company Chamy Media was paid a total of £24,000 by the Met, is still waiting to find out if he faces any charges under Operation Weeting's phone-hacking probe.
He had offered his services as a PR consultant to the Met over lunch with Mr Fedorcio in August 2009.
Mr Yates has said Mr Wallis gave him "categorical assurances" that there was nothing about the News of the World phone-hacking case that could emerge later to embarrass the Metropolitan Police if he was given the job.
The watchdog said last November that Mr Yates had been cleared of misconduct over the allegations.
A Scotland Yard statement said the force accepted the IPCC's findings.
It said: "The report recommends that we review our practices in relation to senior staff who refer friends and relatives to our human resources department for appointment, attachment and holiday employment.
"The MPS has been the subject of much external scrutiny in recent months and the review recommended by the IPCC will form part of our wider response in taking forward the emerging issues and advice such as that from Elizabeth Filkin and the Leveson Inquiry."
The Leveson Inquiry into press standards heard last month that Mr Fedorcio invited people from leading PR firms Bell Pottinger and Hanover to submit rival bids for the contract that was awarded to Mr Wallis.
Chairman Lord Justice Leveson suggested that the Met head of public affairs chose these companies because he knew they would be more expensive than the former News of the World executive, adding: "The point is, this is set up to get a result."
Mr Fedorcio denied this, but confirmed he initially wanted to award the contract to Mr Wallis without any competition.
It said there was no evidence of misconduct which would justify disciplinary proceedings in relation to the claims.
Mr Fedorcio had several cases to answer for misconduct as he "effectively employed Mr Wallis prior to a written contract being prepared or agreed," the IPCC report said.
"The integrity and fairness of the competitive process that followed was compromised as Mr Wallis had already completed work for the MPS prior to this process taking place," it added.
Mr Fedorcio also failed to monitor the contract as advised by procurement services at the force.
"Although the employment of Mr Wallis raised issues of sensitivity Mr Fedorcio did not seek the approval of the Police Authority as outlined in the MPS policy," the report said.
"He failed to ensure that a vetting check was completed on Mr Wallis in accordance with the MPS vetting policy."
Responding to the IPCC's findings on Mr Fedorcio, Scotland Yard said he had made a "very significant" contribution to the force.
The statement said: "Dick Fedorcio, the MPS Director of Public Affairs for the past 14 years, took the decision to leave on 31st March 2012.
"During that period he made a very significant contribution to the work of the MPS.
"In common with other employees MPS police staff have the right to resign, upon giving notice in accordance with their contracts of employment, whilst the subject of disciplinary investigation."
Mr Yates and former Metropolitan Police commissioner Sir Paul Stephenson both resigned after facing questions about their links to Mr Wallis, who was arrested on suspicion of phone-hacking last July.
Mr Yates was criticised for not reopening the phone hacking inquiry after the Guardian published a story in July 2009 revealing the illegal practice was far more widespread than previously believed.