The Press Complaints Commission (PCC) has upheld a complaint against the News of the World over an article that Paul Burrell had sex with Princess Diana.
It ruled that a story "Burrell: I had sex with Diana" breached Clause 1 (accuracy) of its code.
The former royal butler denied boasting to his brother-in-law, Ron Cosgrove, in 1993, and said the article had "besmirched" his name.
Mr Burrell's denial of the claim should have been published, the PCC ruled.
In a statement, Mr Burrell said the "deeply offensive" article had tainted the memory of the princess.
"It suggested I crossed the line of decency, duty, professionalism and integrity whilst serving the princess," he said.
"I pride myself on 21 years of impeccable service in the Royal Household, and these allegations sought to stain that record with a falsehood."
'Misleading information'
The paper said Mr Burrell was not contacted beforehand in case he tried to block the story with an injunction.
Mr Cosgrove told a News of the World reporter that Mr Burrell confided the secret to him in a pub.
The newspaper subsequently published the front-page splash with the headline "Burrell: I had sex with Diana" on 15 June this year.
The PCC said it was not its role to find out if the conversation took place but if the newspaper "had taken care not to publish misleading information".
The commission said: "The claims about him were significant and substantial, and published with great prominence.
"The information came from the recollection of a 15-year-old conversation, and was not corroborated on the record by anyone outside Mr Cosgrove's immediate family.
"It was clear to the commission in these circumstances that there was a strong likelihood that the omission of any denial from Mr Burrell may have misled readers into believing that he accepted Mr Cosgrove's allegations."
'Self-confessed liar'
The newspaper told the PCC that it had three sources for the story, a former associate of Burrell, Mr Cosgrove, and his son Stephen.
It also said that all three had signed affidavits supporting their comments.
The News of the World said as well as not making any attempts to contact Mr Burrell before publication, it chose not to publish his denial after the story appeared because, the newspaper said, he was a "self-confessed and notorious liar".
The paper said Mr Burrell had been labelled as such by the judge at the inquest of the princess earlier this year.
It also said Mr Burrell's denials were reported in other media.
But the PCC's ruling, which has also been published in the pages of the tabloid, stated that it "has never said that people have no right ever to comment on a story, or to be offered a right of reply, if they have misled people in another context".
It added that while there has "never been an absolute requirement for newspapers to contact those who are about to feature in articles", a failure to so "may constitute a lack of care" and in this case the paper had made the wrong decision.
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