"We want to state that we demand a totally independent investigation into my father's death. That can only be carried out by a police force from outside Northern Ireland," said Mr Damian Brown, son of the murdered Seán Brown.
Reading from a prepared statement, Mr Brown thanked Ms O'Loan for the work carried out by her and her investigators. He said: "In light of her statement this morning we believe we were right in taking our case to her."
Mr Kevin Winter, the family solicitor, said the ombudsman's report was a "damning indictment" of a police investigation. It had revealed "a litany of deficiencies and a mockery of a police investigation".
He said the original probe had been seriously wrong and flawed, and a reinvestigation by the PSNI would "only be a case of tarring over the cracks using the same brush". He confirmed the family had instructed him to take legal action to stop the new investigation unless it was conducted by a police service other than the PSNI.
The Sinn Féin Mid Ulster MP, Mr Martin McGuinness, backed the family's demand for an outside inquiry. "For a report to state that no earnest attempt was made by the RUC to investigate who was responsible for the murder of Seán Brown is a hugely significant statement. I support absolutely the demands by the family for an independent inquiry...
"It will not be acceptable to anyone within the republican-nationalist constituency for the PSNI to conduct any serious investigation into this matter."
The Sinn Féin chief negotiator added that the case posed many questions for Special Branch and for Sir Ronnie Flanagan, the former chief constable who also headed the intelligence operation.
"The coroner for the Belfast area had actually written to Ronnie Flanagan making it clear that he believed that there should be an outside investigation of this matter. That demand wasn't even answered," Mr McGuinness said.
The proper thing for Sir Ronnie, now a member of Her Majesty's Inspectorate of Constabulary, the police watchdog in England and Wales, to do is stand down, he said.
The SDLP's policing spokesman, Mr Alex Attwood, said: "The police should respond, and respond fully, to the recommendations. This means accepting the police ombudsman's recommendations for an independent review. The police need to realise that many of the issues around this case go to the heart of nationalist anxieties about the old RUC."
He said that only by accepting the report's recommendations could the police demonstrate that the old policing order was "gone for good". The matter would now be raised through the Policing Board and with the chief constable, Mr Attwood said.