Police ombudsman Michael Maguire said detectives failed to share information with colleagues about the "small but ruthless" gang suspected of involvement in the killings, as they were informants at the time.
The victims were gunned down as they watched a World Cup football match in a bar in the village of Loughinisland. No one has been convicted of the murders.
An estimated 3,500 people died during the three decades of sectarian violence known as 'The Troubles', pitting pro-British unionists against republicans seeking a united Ireland.
In a damning 160-page report, Maguire said police had no direct intelligence about the attack in the Heights Bar, but that the murders could have been prevented if information had been shared.
"When viewed collectively, I have no hesitation in saying collusion was a significant feature of the Loughinisland murders," said the report.
Maguire accused police of turning a blind eye to the activities of pro-British paramilitaries, including gun-running, to protect informants within their ranks.
Instead of being arrested, the men were allowed to distribute arms that police believe were used in at least 70 murders and attempted murders, including the Loughinisland attack.
Maguire backed claims by the victims' families that the police investigation into the attack was deeply flawed.
"There was a catastrophic failure in that police had intelligence as to who the suspects were the day after the killings, but it was over a month before those individuals were arrested," he said.
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