The Press Complaints Commission ruled that the newspaper's failure to include the denial of the claims by Burrell, formerly of Farndon, in the story could have misled readers.

The story centred on claims by Ron Cosgrove, Burrell's brother-in-law, that the former butler confided the secret to him in a pub in 1993.

The newspaper's front-page headline read: 'Burrell: I had sex with Diana'.

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."

The commission heard from the newspaper that it had three sources for the story, a former associate of Burrell, Mr Cosgrove and his son Stephen and that all three had signed affidavits supporting their comments.

The News of the World said that it did not approach Mr Burrell before publication because it was concerned he would block the story with an injunction.

It did not publish his denial after the story appeared because, the newspaper said, he was 'a notorious liar' and had been branded as such by the judge at the inquest of Diana, Princess of Wales.

But the commission said in its ruling 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."