Det Supt Brian Weeden led the investigation into the racist murder of the black A-level student for 18 months - starting three days after the killing.
Stephen died after being stabbed at Eltham in south London in 1993.
Mr Weeden told the inquiry into the murder and police investigation that he did not realise he could arrest the key suspects as soon as he had "reasonable grounds for belief".
Instead, he insisted on waiting for firm evidence of guilt.
Despite having headed heading a number of previous murder inquiries, Mr Weeden said he had only recently realised, after receiving legal advice, that that was the normal requirement for an arrest.
Michael Mansfield QC, for the Lawrence family, asked him: "Do you find that it is rather disturbing that it has taken you all this time to recognise a basic tenet of criminal law?"
Mr Weeden, now retired, responded: "I think it is regrettable."
![[ image: width=150]](/olmedia/100000/images/_101589_Michael_Mansfield_QC_lawyer_for_the_Lawrence_family_at_the_Stephen_Lawrence_inquiry150(27-05-98)grab.jpg)
He said the evidence of a key witness would have provided him with enough proof to make arrests being made within hours.
Stephen's father Neville, who is attending the inquiry, was angry and incredulous that Mr Weeden has misunderstood the law.
"I am sick and disgusted to hear a senior police officer of 30 years experience admit that he did not know the police powers to arrest," he said outside the hearing.
"First of all they say it was a lack of information. Now they are saying they didn't know the law. What next?"
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