Colonia Dignidad was a German commune founded in 1961 by convicted paedophile Paul Schaefer and a group of fellow German immigrants in a remote part of Chile, where residents were indoctrinated and kept as virtual slaves over three decades.
Schaefer also collaborated with the dictatorship of Augusto Pinochet, whose secret police used the colony -- which lies some 350 kilometres south of the capital Santiago -- as a place to torture opponents.
"The handling of Colonia Dignidad was not a glorious chapter of the history of the foreign ministry," said Foreign Minister Frank-Walter Steinmeier.
"For many years, from the 60s to the 80s, German diplomats looked the other way, and did too little to protect their citizens in this commune," he said as the ministry screened a movie about the case starring Emma Watson and Daniel Bruehl.
"Even later, when Colonia Dignidad was dissolved and the people were no longer subjected to the daily torture, the service lacked the determination and transparency to identify its responsibilities and to draw lessons from it," Steinmeier said.
Although Germany's foreign ministry is not to blame for the "havoc wrecked by Paul Schaefer... in part along with the [Chilean] military and dictator", it had a duty to provide "advice and assistance" to German citizens, Steinmeier added.
"It could have sought earlier to use diplomatic pressure to curtail the scope of Colonia's leadership and to push for legal action," he said, adding that the embassy failed to reach out to residents of the commune.
In a bid to draw lessons from the affair, Steinmeier said diplomats were declassifying files that would have otherwise remained under wraps for another 10 years.
"We are making documents dating from between 1986 and 1996 available to researchers and the media," he said, adding that older files were already in the public domain.
The scale of the atrocities at the commune came to light only after the end of Pinochet's regime.
In 1997, Schaefer faced a series of lawsuits and fled Chile. He was arrested in Argentina in 2005 and subsequently convicted in Chile for sexual abuse of children, arms possession and human rights violations.
He died in a Chilean jail in 2010 while serving a 20-year sentence.
Former residents of the commune are bringing a lawsuit against the Chilean state for allowing the camp to operate for years, during which they say numerous victims were abused and enslaved.
A separate case is also being filed against Germany for negligently failing to help its nationals who were abused in the colony, lawyer and plaintiff Winfried Hempel told AFP.