Fayed's father, Mohamed Al Fayed, has accused MI6 of engineering the death of his son and the princess at the behest of Prince Philip, Queen Elizabeth II's husband.
As director of special operations, Dearlove said it was his responsibility to sign off on any operation that would otherwise be illegal, such as breaking into an office or receiving a stolen document.
The operation would then have to be approved by the foreign secretary, a senior member of the government.
Ian Burnett, a lawyer for the coroner's inquest, asked Dearlove whether he could confirm that "no authorization was sought in respect of any activities concerning Princess Diana."
"I can absolutely confirm that," Dearlove said.
Burnett asked: "And it would plainly have been outside the functions of (the agency) to do so?"
"Had it been done, it would have been outside the function of the service," Dearlove said.
Burnett asked if it was possible for rogue elements to mount an operation outside the chain of command.
"I would have regarded that as an impossibility," Dearlove said.
Dearlove, who headed MI6 from 1999-2004, said he did not authorize any slayings, and denied a claim by former agent Richard Tomlinson about a proposed plan for assassinating Serbian President Slobodan Milosevic.
Dearlove said he believed the idea involved another target -- but that it was immediately rejected at a low level. He said the proposal was "killed stone dead."
Michael Mansfield, Al Fayed's attorney, pressed Dearlove on training given to agents on the issue of assassination.
Dearlove acknowledged that the agency's "no assassination" policy was not put down in writing in training manuals but would have been communicated orally.
He also said the claim that Prince Philip directed MI6 was "utterly ridiculous." He said there was no formal relationship between the agency and the prince, although Philip had visited the agency's offices in the queen's company.
He also dismissed Fayed's claim that Philip and the intelligence agencies effectively ran the country.
"I am tempted to say I am flattered, but once again it is such an absurd allegation. ... It is completely off the map," he said.
Dearlove's appearance before the inquest was an extraordinary exception to agency policy of neither publicly confirming nor denying any allegations about its activities.
Dearlove is the first MI6 director whose name has been publicly confirmed. Previous directors were known only as "C."