Writing referee report: found major error, now what?
If there's a "major mistake in their method which invalidates their results more or less entirely" it seems pretty clear that you should explain this in your review, and not bother writing much else. (This seems so obvious, I wonder if I'm misunderstanding your question.) Why on earth would you "write the rest of the referee report assuming that they haven't made this mistake," if you're quite sure that the mistake exists, and that it invalidates most of the paper? What purpose would it serve, for the authors or future readers?