The Dowler's family lawyer Mark Lewis issued a statement yesterday accusing the tabloid of a "disgraceful" act, and said that it was "distress heaped upon tragedy to learn that the News of the World had no humanity at such a terrible time".
Lewis said that Dowler's parents, Sally and Robert, would be making a claim for damages from the tabloid.
The newspaper – which was under the editorship of Rebekah Brooks at the time – allegedly deleted messages from Dowler's phone to free up space, giving her family and the police false hope that she was alive.
Lewis also pointed to an article in the newspaper, about a woman pretending to be Milly Dowler, which clearly appears to have been based on information taken from the missing girl's voicemail messages.
The story, published on 14 April 2002, was about a woman applying to a recruitment agency while posing as Dowler. It claims that the woman gave the agency Dowler's phone number and that "the agency used the number to contact Milly when a job vacancy arose and left a message on her voicemail after the 13-year-old vanished."
Dowler disappeared on her way home in Walton-on-Thames in March 2002. Levi Bellfield was jailed for life last month after being found guilty of her murder.
According to Lewis, Sally and Robert Dowler's phones were also targeted by the tabloid and they were made aware of the hacking by the Met police in April, a month before Bellfield went on trial.
The evidence is understood to have come from a cache of 11,000 pages seized by the Met police's Operation Weeting team from private investigator Glenn Mulcaire when he was arrested in 2006.
A high court judge ruled earlier this month that a group of public figures bringing cases against the News of the World over phone hacking could have access to part of the cache.
This latest and most damning revelation about the so-called "dark arts" at the News of the World are likely to increase the pressure on Brooks, who is now chief executive of News International, and her then-deputy editor Andy Coulson.
Coulson, who succeeded Brooks as editor when she moved to the Sun, resigned from his position as David Cameron's communications chief earlier this year over the phone-hacking scandal.
Labour MP Tom Watson yesterday called on Cameron to take action over the revelations.
"Surely now we should hear from David Cameron and Ed Miliband. It's utterly disgraceful that they've let this scandal run on for as long as it has. No more cowardice, we want action."
In a statement this morning, Cameron said the claims were "quite, quite shocking".
"On the question of the really appalling allegations about the telephone of Milly Dowler, if they are true, this is a truly dreadful act and a truly dreadful situation.
"What I have read in the papers is quite, quite shocking, that someone could do this actually knowing that the police were trying to find this person and trying to find out what had happened, and we all now know the tragedy that took place."
Ed Miliband responded to the news on Twitter yesterday, writing that he was "shocked by the news of the hacking of Milly Dowler's phone. Police must find out who was responsible".
A spokesperson for the News of the World's parent company, News International said: "We have been co-operating fully with Operation Weeting since our voluntary disclosure in January restarted the investigation into illegal voicemail interception.
"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."
Glenn Mulcaire was jailed in 2007 for his part in the scandal, alongside the newspaper's former royal correspondent Clive Goodman.