The 7/7 coroner sharply criticised MI5 today as she ruled that the emergency services could not have saved any of those who died in the attacks.
Lady Justice Hallett said the 52 victims of the July 2005 London bombings were unlawfully killed by four Muslim extremists and rejected claims that security agency failings caused or contributed to their deaths.
But she raised serious concerns about how MI5, also known as the Security Service, investigates and prioritises suspects, warning that poor record-keeping could allow flawed decisions to slip through with "dire consequences".
Families of those killed in the suicide attacks on three Tube trains and a double-decker bus welcomed the coroner's long-awaited findings.
Some said they still had unanswered questions and called for a wider-ranging independent inquiry into the background to the attacks.
Lady Justice Hallett made nine recommendations for the Security Service, the emergency services and Transport for London aimed at preventing other deaths in the future.
She singled out MI5's "dreadful" editing of a sharp colour photograph of 7/7 ringleader Mohammed Sidique Khan and his number two Shehzad Tanweer, taken by an undercover surveillance team at a motorway service station in February 2004.
At this time the Security Service did not know who the pair were, although they had been seen meeting a known terrorist who was plotting a fertiliser bomb atrocity.
The cropped blurry black-and-white image of Khan was meant to be shown to al-Qa'ida supergrass Mohammed Junaid Babar, who met the British jihadist at a terrorist training camp in Pakistan.
But the picture was never put before Babar, apparently because its quality was so poor.
Lady Justice Hallett said there was "no satisfactory explanation" for the badly-cropped pictures being used but found they had "little or no practical effect" because the informant did not recognise Khan when later shown a different picture of him.
She said she was "troubled" that it was still not MI5's normal practice for older photographs to be shown to new sources and recommended a review of the security agency's procedures to ensure informants are shown the best possible images.
The coroner highlighted the bereaved families' concerns about the limited records kept by MI5 about decisions on prioritising suspects and warned of the "possibly dire consequences of a flawed decision which cannot be properly supervised".
Surveillance teams watched, followed and photographed Khan and Tanweer travelling from their homes in Leeds to meet fertiliser bomb plot mastermind Omar Khyam and his cell in February and March 2004.
But intelligence officials concluded that the pair were only small-time fraudsters and therefore not a top priority for further inquiries.
Lady Justice Hallett recommended that MI5 should examine its procedures "to establish if there is room for further improvement in the recording of decisions relating to the assessment of targets".
She also singled out weaknesses in the Intelligence and Security Committee (ISC), the Parliamentary body which oversees the Security Service's work.
The inquest revealed a series of mistakes in the ISC's 2009 report into whether the 7/7 attacks could have been prevented, which was submitted to MI5 to be checked for accuracy.
The coroner said: "It is unfortunate to say the least that a body established by Parliament to review the work of the Security Service, in closed hearings, reported inaccurately in these regards and that these points were not corrected."
ISC chairman Sir Malcolm Rifkind criticised his committee's lack of powers to demand information from Britain's intelligence agencies and called for radical reforms.
The bombings carried out by Khan, 30, Tanweer, 22, Hasib Hussain, 18, and Jermaine Lindsay, 19, were the worst single terrorist atrocity on British soil.
The £4.5 million inquest at the Royal Courts of Justice in London began in October and heard five months of harrowing testimony before closing its evidence sessions in March.
Lady Justice Hallett, an appeal court judge appointed to hear the inquest, revealed her findings today in front of survivors of the attacks and some 70 tearful relatives of victims packed into Court 73.
The coroner recommended a review of the funding for the London Air Ambulance, which played a crucial role in treating horrifically injured survivors of the atrocities.
She said: "I am concerned that London, a major global capital, host to the Olympics in 2012 and a prime terrorist target, should find itself dependent upon corporate funding and charitable donations, and upon professional volunteers giving up their limited free time in order to provide life-saving emergency medical care."
Lady Justice Hallett also called for a review of how the emergency services confirm that the electricity is switched off in Tube tracks after safety rules delayed some firefighters from going down to the bombed trains.
As well as recording her verdicts for the victims and making recommendations, she ruled that separate inquests should not be held for the four suicide bombers.
Some of the bereaved families said they felt today's hearing "drew a line" under the atrocity, but others vowed to continue battling for answers to their questions.
Graham Foulkes, whose 22-year-old son David was killed by Khan at Edgware Road Tube station, said it was "unprecedented" for a senior judge to make such recommendations for the Security Service.
"It really must compel (Home Secretary) Theresa May to review the whole operation of the security services in the UK, not just MI5," he said.