The 29st politician was left free to abuse children as young as eight despite 144 complaints by victims, author Simon Danczuk, a Labour MP, claims.
His book, Smile for the Camera: the Double Life of Cyril Smith, says police forces repeatedly investigated sex abuse allegations against the Liberal but attempts to prosecute him were blocked.
Officers were told they would be sacked and were gagged by the Official Secrets Act, he says.
Smith, who died four years ago aged 82, served as MP for Rochdale, Lancashire, the town Mr Danczuk now represents.
In the book, Mr Danczuk wrote that Smith's activities had been covered up by the "very top of the Establishment".
"At first, I respected him for his homespun politics, his spit-and-sawdust grit and his passion. But in time, the scales fell from my eyes and I was confronted with absolute horror. Once you looked beyond the jolly clown playing for the camera, there was a sickening, dark heart.
"I saw it in police files that had been hidden for years and I heard it in the desperate voices of grown men Cyril had abused as boys.
"As soon as the first victim approached me, there was no turning back. Every email, every phone call, every meeting uncovered more about his double life.
"And the more I found out, the more I came to realise that this wasn't just about abuse, it was about power - and a cover-up that reached from Rochdale all the way to the very top of the Establishment.
"Smith posed as a tireless worker for children - at one point he was governor of 29 local schools and set up a youth charity, Rochdale Childer - using it all as a cover to prowl from classroom to classroom and youth club to youth club."
A Liberal Democrat spokesman said: "Cyril Smith's acts were vile and repugnant and we have nothing but sympathy for those whose lives he ruined.
"His actions were not known to or condoned by the Liberal Party or the Liberal Democrats."
A further seven people have alleged they were sexually and physically abused at a residential school linked to the late Smith.
The allegations from the 1970s onwards relate to Knowl View School in Rochdale, where Smith served as chairman of governors
In November 2012, Greater Manchester Police (GMP) said Sir Cyril abused young boys in the 1960s in his role as secretary of the Rochdale Hostel for Boys Association.
He had been accused of abusing eight youngsters at Cambridge Hostel in the town by spanking and touching them.
After that announcement GMP began looking at fresh claims of abuse at Knowl View, a council-run school for vulnerable boys which closed in the mid-1990s.
Police said the complaints from the seven alleged victims relate to "at least 11 potential suspects".
Detective Inspector Caroline Ward said: "Following the publicity surrounding Sir Cyril Smith last year, seven people came forward to report physical and sexual abuse which occurred at Knowl View from the 1970s onwards.
"Those allegations relate to physical and sexual abuse that took place between pupils and adults at the school and these complaints are currently being investigated by officers from Greater Manchester Police's Public Protection Division.
"These complaints relate to at least 11 potential suspects, but as not all victims knew the full names of their abusers we cannot as yet confirm the exact number of different suspects. Also, we are working to establish if any of the potential suspects are now deceased.
"The allegations we have received are building up a picture of the regime that was in place at Knowl View at that time. We have also been working very closely with Rochdale Council and we are now examining boxes of files held about Knowl View as part of investigation.
"I would encourage anyone who was a victim of either sexual or physical abuse to come forward and speak to police as the more evidence we have the better the chances of bringing abusers to justice.
"We totally understand that for many people they will not want to relive the abuse they suffered, but for those who do want to come forward I want to give you complete confidence that your complaints will be treated seriously and thoroughly investigated."
It is understood the fresh Knowl View allegations are not against Sir Cyril.
In 2000, GMP carried out a "comprehensive investigation" into abuse claims at the school which led to the conviction of one man for indecent assault and gross indecency. It was ruled there was insufficient evidence to charge any other individuals and no specific allegations were made at the time against Sir Cyril.
An independent review into the way Knowl View was run is due to report back to Rochdale Council next month.
Andrew Warnock QC has been tasked to probe all council decision making about the school.
Three separate files regarding Sir Cyril's actions at Cambridge House were passed to the Director of Public Prosecutions and the Crown Prosecution Service, although on each occasion no prosecution was pursued.