Sally Dowler told the inquiry investigating Britain's media ethics that her 13-year-old daughter's phone had been cleared of some messages shortly after she disappeared in early 2002, suggesting that she was checking her voicemail.
Mrs Dowler described her joy when she was given false hope that Milly was still alive.
She told the inquiry: "I rang her phone. It clicked through onto her voicemail, so I heard her voice and it was just like, 'she's picked up her voicemail, she's alive'.
In fact Milly was dead and the person clearing the messages worked for the News of the World tabloid.
The Dowlers were the first in a string of witnesses on Monday, including celebrities such as actor Hugh Grant, actress Sienna Miller, and author J.K. Rowling, who will testify to the inquiry set up by Prime Minister David Cameron that they were followed, photographed, entrapped and harassed by tabloid journalists.
Mrs Dowler rang her daughter's phone repeatedly in the weeks after Milly vanished as she walked home in Walton-on-Thames, Surrey, in March 2002, the inquiry was told.
Mrs Dowler described the moment, just before the trial of a man accused of Milly's murder, when police told her and her husband Bob that Mulcaire hacked their daughter's phone.
She said: "We got a call from our FLO (police family liaison officer) to say that the Met Police wanted to see us and to tell us vaguely what it was about.
"As soon as I was told it was about phone hacking, literally I didn't sleep for about three nights because you replay everything in your mind and just think, 'Oh, that makes sense now, that makes sense'."
The inquiry, led by judge Brian Leveson, began its formal hearings at the Royal Courts of Justice in London last week.
It heard that police believe phone hacking at the News of the World had begun by 2002 and continued until at least 2009.
The first part of the inquiry is looking at the culture, practices and ethics of the press in general.
The second part, examining the extent of unlawful activities by journalists, will not begin until detectives have completed their investigation into alleged phone hacking and corrupt payments to police and any prosecutions have concluded.
The inquiry could recommend major changes to the way the media in Britain is regulated.
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