The Home Secretary told MPs that an independent expert panel is to be set up to probe claims of paedophile activities in Parliament, hospitals, the BBC, the NHS, churches, firms and other public institutions following the sickening claims against Jimmy Savile, former Liberal MP Cyril Smith and other alleged serial perverts.
And she also appointed a children’s charity chief to spearhead a separate review into the handling of child abuse claims around Westminster in the 1980s.
Peter Wanless, chief executive of the National Society for the Prevention of Cruelty to Children (NSPCC), will examine the way the Home Office, police and prosecutors dealt with
information about sickening crimes by a suspected paedophile ring said to involve public figures in the “higher echelons” of the political establishment.
Mrs May said: “In recent years, we have seen appalling cases of organised and persistent child sex abuse.”
She added: “Our priority must be the prosecution of the people behind these disgusting crimes.”
Her decision, after days of resisting calls for an inquiry, followed increasing pressure over claims that alleged abuse by senior figures at Westminster was covered up.
One campaigner warned that the allegations concerned young boys being sexually abused by men in the “higher echelons of Westminster life”.
Peter Saunders, of the National Association for People Abused Childhood, told BBC Radio 5 the outcry would “make the expenses scandal look like a picnic in the park” if the claims were proved to be true.
Backing the Home Secretary’s inquiry, David Cameron said yesterday: “I am absolutely determined that we are going to get to the bottom of these allegations and we’re going to leave no stone unturned to find out the truth about what happened.”
He added: “It is also vital we learn the lessons right across the board from these things that have gone wrong.
“And it’s also important that the police feel that they can go wherever the evidence leads and they can make all the appropriate arrangements to investigate these things properly.
“Those three things need to happen - robust inquiries that get to the truth, police investigations that pursue the guilty and find out what has happened and proper lessons learned so we make sure these things will not happen again.
In an emergency Commons statement, Mrs May told MPs: “Some of these cases have exposed a failure by public bodies to take their responsibilities seriously and some have shown that the organisations responsible for protecting children from abuse - including the police, social services and schools, have failed to work together properly.”
She added: “I can now tell the House that the Government will establish an independent inquiry panel of experts in the law and child protection to consider whether public bodies and other non-state institutions have taken seriously their duty of care to protect children from sexual abuse.
“The inquiry panel will be chaired by an appropriately senior and experienced figure.
“It will begin its work as soon as possible after the appointment of the chairman and others members of the panel.
“Given the scope of its work it is not likely to report before the general election.
"But I will make sure that it provides an update on its progress to parliament before May next year.”
Mrs May told MPs that the inquiry will be carried out by a non-statutory panel similar to the probe into the Hillsborough Stadium tragedy.
The Home Secretary said the format would ensure the inquiry could begin work quickly rather than being delayed by the need for Parliamentary legislation.
And she said the probe could be converted into a full public inquiry if the panel chairman requested it.
Former Tory Home Secretary Lord Brittan welcomed the probe tonight.
But he insisted that claims he failed to deal adequately as home secretary with a dossier of information handed to him by campaigning Tory MP Geoffrey Dickens in 1983 were “completely without foundation”.
In the Commons, shadow home secretary Yvette Cooper welcomed Mrs May’s “changed position” on an inquiry into the scandal.
“The Home Secretary is right today to announce she has changed her position and her response on child abuse but I want to press on the detail,” she said.
“We need three things: justice and support for victims, the truth about what happened and how the Home Office and others responded, and stronger child protection and reforms for the future.”
NSPCC boss Mr Wanless said: “It’s important to discover everything we can about what happened to these files, not only to help those who may have been victims of abuse many years ago but also to protect those children at risk now.
“The NSPCC is known for its independence and I will approach this review with the due diligence and dedication it warrants - which is what all children have every right to expect.”
Mr Wanless’s review is expected to report to Mrs May within eight to 10 weeks.
Any findings relating to the Director of Public Prosecutions will also be reported to the Attorney General Dominic Grieve.
But the independent inquiry panel will not report in full before the general election, Mrs May told MPs.
Following a review last year, the Home Office admitted that more than 100 files relating to allegations of child abuse have gone missing over a period of 20 years.
They included a dossier, alleging the involvement of public figures in a paedophile ring, handed to then home secretary Leon Brittan by Mr Dickens, who died in 1995.
The missing dossier is believed to be linked to the alleged abuse of children at the Elm Guest House in south-west London.
Former Tory Cabinet minister Lord Tebbit has said that child abuse “may well” have been covered up in a conspiracy to protect the Westminster establishment.
During Commons exchanges about Mrs May's announcement, a claim that Tory whips would sometimes cover up scandals "involving small boys" to protect fellow MPs was brought up.
Tim Fortescue, who was a whip in Edward Heath's government, made the boast in a BBC documentary in 1995.
Mr Forescue, who died in 2008, told the programme: “For anyone with any sense, who was in trouble, would come to the whips and tell them the truth, and say now, I’m in a jam, can you help?
“It might be debt, it might be… a scandal involving small boys, or any kind of scandal in which a member seemed likely to be mixed up in, they’d come and ask if we could help and if we could, we did.
“And we would do everything we can because we would store up brownie points… and if I mean, that sounds a pretty, pretty nasty reason, but it’s one of the reasons because if we could get a chap out of trouble then, he will do as we ask forever more.”
His claim was raised in the Commons by Labour MP Lisa Nandy yesterday.
She said: “In the mid-1990s a senior ex-whip who had served in the 1970s told the BBC that the whip's office routinely helped MPs with scandals including those in his own words involving small boys.
“They did it in order to exert control over those individuals and prevent problems for the government.
"It’s just one powerful example of how personal and political interests can conspire to prevent justice from happening.
“Can we have a full commitment that this inquiry will consider not just police and social services but also what happens at the heart of power.?
“If those systems are found to exist today they will be overturned, whether that makes life uncomfortable for political parties, whether it makes life uncomfortable for Parliament or whether it makes life uncomfortable for the Government itself.”
Mrs May replied: “It is not my intention that political parties should be outside the scope of the inquiry.
“It think this has to be wide-ranging, it has to look at every area where it is possible, that people have been guilty of abuse and we need to learn lessons to ensure that the systems that we have in place are able to identify that and deal with it appropriately.”