The review into abuse at Little Ted's nursery found that a lack of formal staff supervision was partly to blame.
Vanessa George, 40, from Plymouth, was jailed last year for a minimum of seven years after admitting abusing toddlers at the nursery and photographing it.
No other staff at Little Ted's were involved in the abuse.
The privately-run nursery was closed in June last year when George was arrested and police began an inquiry into the abuse, which started in December 2008.
A new pre-school facility called Greenshoots opened at the site two months ago.
Plymouth City Council initiated the serious case review into what happened at Little Ted's, in Laira, so that lessons could be learnt.
George admitted seven sexual assaults and six counts of making and distributing indecent pictures of children.
She used a mobile phone to take pictures of herself abusing toddlers and sent them to Colin Blanchard, 39, from Rochdale, who forwarded them to Angela Allen, 39, from Nottingham.'Explicit' culture
Allen admitted four child sex assaults and one count of distributing an indecent image and was jailed for at least five years.
Blanchard pleaded guilty to 17 offences relating to indecent images of children and two sexual assaults on children and is awaiting sentence.
They shared indecent images over the internet after meeting on the social networking website Facebook.
The Plymouth Safeguarding Children Board review concluded that Little Ted's "provided an ideal environment within which George could abuse".While evidence pointed to George having no sexual interest in children until she came into contact with Blanchard, it found there appeared to have been a complete lack of recognition of a culture in which explicit sexual references about adults in conversation were the norm.
The review concluded that there was a "weak governance framework" at the private nursery with "no clear lines of accountability".
It said the environment enabled a culture to develop in which staff did not feel able to challenge some inappropriate behaviour by George.Staff 'worried'
Staff became increasingly uncomfortable and worried about George's behaviour, but felt they had nowhere to go with these feelings, it said.
It found an informal recruitment process was also partly to blame.
Because nurseries have had to be registered with the education watchdog Ofsted since 2001, the case review also looked at whether Ofsted's regulation regime was sufficiently thorough.An inspection of Little Ted's in 2008, several months before George began abusing children there, rated the nursery as "good" for protecting children from harm or neglect.However, from staff interviews and discussions with parents as well as a review of the records, it was apparent that Little Ted's did not provide a safe, positive environment for children in its care.
The report said: "This would indicate that either the individual inspections were not rigorous enough, or the framework for inspection is not adequate."
However it found there was no indication "that any professional could have reasonably predicted that George might be a risk to children".
In a statement, Ofsed responded to the findings by saying: "Ofsted has already implemented a number of changes in the way we work as a result of this review and to address the recommendations made."
It said it had improved its complaints process and the way it shared information with local authorities.'No stone unturned'
Brian Vincent, councillor for Plymouth's Efford and Lipson ward, said he was happy that "no stone's been left unturned" in the review.
He said: "I spoke with some of the parents ahead of this review and their main concern was that it wouldn't be a full one.
"I think they'll now be reassured because of the great length and depth that's gone into it.
"Once they realise this, they can get on with their lives and underneath it all that's what they want - to get back to normal."
The serious case review detailed a number of lessons learnt from the abuse, including the danger of mobile phones within day care settings, and an urgent need to develop effective staff supervision.
Staff need training to help recognise potential signs of abuse and to become confident in responding to the behaviour of colleagues, it added.
In its final conclusion, the report said while there were a number of factors that came together to support a culture where abuse was possible, ultimate responsibility must rest with George.
Thanks to BBC News for this report.