The elderly man and woman have now left their homes
Two pensioners in a sheltered housing scheme on South Tyneside were "bullied, publicly humiliated and abused" by a council warden, a report has found.
South Tyneside Council failed to act for almost a year, despite being asked for help by the elderly man and woman, the local government ombudsman said.
The authority has accepted the report's findings and agreed to pay the neighbours £2,500 each in compensation.
The charity Action on Elder Abuse said it was "appalled" by the case.
The pair were eventually forced to leave their homes, understood to be at the Curran House Mews sheltered housing complex in Jarrow.
The ombudsman's report said the two residents (identified as Mr P and Mrs S) were in their 60s and neighbours in a sheltered housing scheme owned by the council and managed by South Tyneside Homes.
In 2004 they complained to the council that a female warden was restricting their use of communal facilities and verbally threatening them on a regular basis.
But the council failed to do anything to resolve the situation, which worsened when the warden's daughter also began abusing the pair, the report revealed.
The residents later supplied a tape recording of threats made by the warden's daughter, which were described as "harrowing".
Ombudsman Anne Seex said the council's failures meant the complainants suffered "harassment and fear whilst living in what should have been a supportive environment".
She added: "Far more significant than its failure to follow its own procedures is the council's grave substantive failure to undertake any proper investigation of serious allegations about the behaviour of an employee in a position of responsibility, also its inaction in the face of very persuasive evidence of serious problems.
"This was maladministration with potentially very serious consequences."
South Tyneside Council said it expressed regret and had instituted an internal inquiry, as well as paying the pair compensation and giving them priority for rehousing.
The warden no longer works for the authority.
Gary FitzGerald, chief executive of the charity Action on Elder Abuse said: "It is appalling that the council failed to appropriately implement its own protection policy, a situation which obviously placed these people at serious risk.
"There should be a full and independent inquiry into exactly what the council was doing in this regard and why it appears to have failed so miserably in ensuring an adequate protective response to these older people."