Adrienne Page, for Christopher Lillie and Dawn Reed, said the report was published more than four years after they were acquitted of indecently assaulting young children from Shieldfield Nursery in Newcastle.
Mr Lillie and Ms Reed claim they were libelled by Newcastle City Council, social workers Richard Barker, Judith Jones and Roy Wardell, and clinical psychologist Jacqui Saradjian.
The four wrote a council-commissioned report into the events at the nursery titled 'Abuse in the Early Years' which was published in November 1998.
They are also suing the Newcastle Chronicle and Journal Limited for libel over more than 80 articles and letters published between November 1998 and September 1999, following the report's release.
All defendants claim the report was covered by 'qualified privilege', while the Chronicle and the four authors also claim the sexual abuse claims were 'justified'. They intend to rely on cases of 27 children who were at one time at the nursery.
In her opening address to Mr justice Eady, who is hearing the case without a jury, Miss Page said publication of the report was 'utterly devastating and ruinous' for Mr Lillie and Ms Reed, their partners and families.
Employed by the council as qualified nursery officers, they were responsible for the care of children aged from two to three from about March 1992.
In Easter 1993, the mother of a boy aged two went to police complaining he had been hurt by Mr Lillie which led to an extensive investigation.
In July 1994, Mr Lillie and Ms Reed faced Newcastle Crown Court charged with 11 counts of indecently assaulting five little girls and a boy from the nursery. Mr Lillie also was charged with raping a girl.
But the judge directed they be acquitted on all charges, ruling that there could not be a fair trial after he saw video testimony of the child representing the prosecution's best case.
'After the acquittals were entered, a riot broke out in the courtroom. The dock was stormed and screams of 'hang them' filled the court as Dawn and Christopher were whistled out of the dock and driven away to their freedom in a police van with a screaming mob in chase,' Miss Page said.
By 1998, Ms Reed was married and living in Stanley. After a 'promising career' had been cut short, she was working in a mini-cab firm's office.
Mr Lillie was living in Gateshead with a woman who had been his girlfriend since 1992. He was working in a local hotel training to be a sous chef.
'They were both of them, in their separate ways, on the road to rebuilding and restoring their lives and putting the nightmare of the recent past behind them,' she said.
But on November 12, 1998, they found themselves again in the news headlines after the council published and released to the press the 'Abuse in Early Years' report, containing conclusions of the four-member Review Team.
Miss Page said these were that Mr Lillie and Ms Reed had 'sexually, physically and emotionally abused a large number of young children whose care had been entrusted to them'.
Further, it accused them of being members of a paedophile ring who used their positions at the nursery to procure young children for rape and abuse by themselves and other ring members.
This was said to have included handing over children to be raped and assaulted and used in sexual acts and in the making of pornographic films.
'The conclusions published in this report accused Chris and Dawn of the most serious and repugnant crimes it is possible to imagine,' she said.
'All the more abhorrent for relating to very young children of two or three years old whose care was entrusted to them.
'They had been convicted by the authors of this report after a process from which the most elementary notions of natural justice, fairness and impartiality were absent.'
Miss Page said to have published 'without warning and without allowing them to the opportunity to seek legal advice, security advice, places of safety to go to, or even to prepare themselves emotionally is not, on the face of it, something that can be readily understood'.
Ms Reed fled alone to Scotland, while Mr Lillie fled alone to Manchester. Their barrister said the court would hear evidence of the 'nightmare impact' of the publication on them and their families.
Miss Page said the inquiry failings included there being no cross-examination of parents who claimed the pair sexually abused their children. Mr Lillie and Ms Reed were not informed of the 'evidence' being given against them, none of which was taken on oath.
The report's publication left them with only one possible avenue of overturning the 'convictions' - a libel action.
Miss Page said if the report's conclusions were correct, then for years all the children, all the parents, all the students who passed through the nursery, all the staff and managers failed to notice anything suspicious.
This was while, the report alleged, 'at the hands of Chris and Dawn, children in their care were being subjected to rape, buggery, bleeding anuses, bleeding vaginas, and other assaults and outrages'.
'Whilst this was going on between dinner time and the arrival of the social services bus to take children home, large numbers of boisterous little two to three year olds were suffering the most dreadful and horrific abuse, not only at the hands of Chris and Dawn, but also at the hands of unknown others.'
Describing that scenario as 'utterly incredible', she said the report conclusions were completely divorced from reality and common sense.
Miss Page will continue her opening address today. The barrister for the council and review team will then follow, while the publisher's opening is expected later in the week.
STRAND NEWS SERVICE