An investigator working for the News of the World allegedly hacked into the mobile phone of murdered girl Milly Dowler, a lawyer for the family says.
Mark Lewis said police told her parents that Glenn Mulcaire hacked into her voicemail while she was missing.
The Guardian has claimed he intercepted messages left by relatives and said the NoW deleted some, which gave her parents false hope she was alive.
NoW parent firm News International said the development was of "great concern".
Mr Lewis said the hacking dated from 2002 when the NoW was under the editorship of Rebekah Brooks (nee Wade) - now News International's chief executive.
In a statement he said: "Sally and Bob Dowler have been through so much grief and trauma without further distressing revelations to them regarding the loss of their daughter.
'Despicable and evil'
"It is distress heaped upon tragedy to learn the News of the World have no humanity at such a terrible time.
"The fact that they were prepared to act in such a heinous way that could have jeopardised the police investigation and gave them false hope is despicable."
He also said the Dowlers had been told their own phones were targeted.
The Guardian claims that after Milly's voicemail facility became full, the NoW deleted messages it had already listened to.
It quotes one source as saying that this gave false hope to friends and family, who mistakenly believed that Milly herself had cleared her message inbox and that therefore she was still alive.
By that time, she had been murdered by a nightclub doorman, Levi Bellfield, who was convicted of the killing last month.
The Guardian also alleges that the NoW employed another private investigator, Steve Whittamore, to illegally obtain ex-directory numbers for families called Dowler living in Walton-on-Thames, where Milly and her family lived.
A News International spokesman said it had been co-operating fully with the police inquiry into hacking since News International's "voluntary disclosure in January restarted the investigation into illegal voicemail interception".
He said: "This particular case is clearly a development of great concern and we will be conducting our own inquiries as a result.
"We will obviously co-operate fully with any police request on this should we be asked."
Reacting to the story, Tom Watson MP told the Commons it was a "despicable and evil act that will shock parents up and down the land".
He also said it strongly suggested that parliament was misled in the press standards inquiry that was held by the Department for Culture Media and Sport last year.
Former deputy prime minister Lord Prescott, who claims his phone was also hacked, said the case proved Rupert Murdoch - who owns the NoW - should not be allowed to purchase the satellite broadcaster BSkyB.
He said the revelations cast fresh doubt on claims by NoW editors Rebekah Brooks and Andy Coulson that they did not know of hacking by employees of the newspaper.
"It's quite appalling. What alarms me most of all is that basically we have here Rebekah Brooks and also Andy Coulson, who were editor and deputy editor," Mr Prescott said.
"These are the people who said they knew nothing about any of these things that went on. Somebody must have sanctioned it."
In a separate development, a lawyer acting for Colin Stagg has confirmed police contacted him as part of the News of the World phone hacking investigation.
Mr Stagg won more than £700,000 in compensation after being wrongfully arrested over the Rachel Nickell murder.
His solicitor Alex Tribick told the BBC that police had advised Mr Stagg that his name had appeared in documentation associated with the police investigation.
The claims about Milly Dowler are significant in the overall phone hacking inquiry, which has until now focused largely on the intrusion into the private lives of celebrities.
Nick Davies, the special correspondent from the Guardian who wrote the story, told the BBC:
"The editor of the News of the World at the time that this particular episode took place was Rebekah Brooks, who is now Rupert Murdoch's chief executive in the UK.
"This is one of the very few episodes that happened when she was editing the paper, and she's clearly going to have to answer some questions about what she knew about what was going on."
In January, the High Court will hear claims from five test cases involving public figures who say their phones were hacked into.
They are former footballer Paul Gascoigne, actor Jude Law, sports agent Sky Andrew, interior designer Kelly Hoppen and MP Chris Bryant.
The cases arise out of the disclosure of information by the Metropolitan Police relating to material forfeited by Mulcaire.
He and former NoW royal editor Clive Goodman were jailed in 2007 over tapping the phones of members of the royal household.
Five alleged victims have reached out-of-court settlements with the newspaper, including celebrity publicist Max Clifford, who received a reported £1m.
Five journalists have been arrested over the allegations.