Repressive drug law enforcement is driving high rates of infection among injecting drug users, it said.
Resources need to be redirected into treatment and prevention.
The Commission estimated that of 16 million people worldwide who inject drugs, 10 million are living with hepatitis C.
This puts them at risk of fatal and debilitating liver disease.
The Global Commission called on governments to decriminalise drug use and provide schemes, such as those which give access to sterile needles, to halt the spread of the disease.
The group, which includes seven former presidents, ex-UN chief Kofi Annan and other world leaders, has previously linked the "failed" war on drugs with the spread of HIV.
In its latest report it says in some countries with the harshest drug policies more than 90% of people who inject drugs are living with hepatitis C.
Eastern Europe and Central Asia have seen the fastest spread of infection and the highest number of infections has been reported in China, the Russian Federation and the USA.
Strongly enforced policies criminalising drug use force users away from public health services and locking up vast numbers of injecting users perpetuates the spread of the infection, the Commission warned in the latest report.
Hepatitis C is highly infectious and around a quarter of those with chronic infection will develop fatal liver disease.
But the disease can go undetected for several years with no or few symptoms and many people are completely unaware they are infected.
Governments "must immediately redirect resources away from the 'war on drugs' and into public health approaches that maximise hepatitis C prevention and care", the report recommended.
"Hepatitis C has to be one of the most grossly miscalculated diseases by governments on the planet," said commissioner Michel Kazatchkine, who is also the UN secretary-general's special envoy on HIV/AIDS in Eastern Europe and Central Asia.
"It is a disgrace that barely a handful of countries can actually show significant declines in new infections of hepatitis C among people who inject drugs."
The report highlighted Scotland's national Hepatitis C Action Plan as an example of best practice.
Launched in 2006, the strategy has led to a four-to-six-fold increase in the provision of sterile injecting equipment and an increase in the number of people, mainly in drug services and prisons, being tested for the infection.
The provisions put in place, which also include an eight-fold increase in the number of prisoners receiving treatment for hepatitis C, have led to falling rates of infection.
The Commission also highlights the potential for dramatic savings to countries' health and welfare budgets in the long term from preventing cases of liver disease.
"The war on drugs is a war on common sense," said commissioner Ruth Dreifuss, who is also the former president of Switzerland.
"Repressive drug policies are ineffective, violate basic human rights, generate violence and expose individuals and communities to unnecessary risks.
"The hepatitis C epidemic, totally preventable and curable, is yet another proof that the drug policy status quo has failed us all miserably."
The World Hepatitis Alliance said: "It is incomprehensible that hepatitis C, along with hepatitis B, is so consistently ignored.
"If you compare rates of hepatitis C in drug users in countries with good harm reduction and more enlightened drug policies with those in countries without, it is clear that regarding drug use exclusively as a criminal justice issue is a health disaster. Hepatitis C, its prevention, care and treatment must be addressed and must be addressed as the health issue it is."
A UK government spokesperson said: "This government is committed to breaking the vicious cycle of addiction and drug usage remains at its lowest level since records began.
"The best protection from drugs is not to take them in the first place, but we must ensure good healthcare is available for those who want to treat their addiction - and we are seeing a rise in the numbers of users exiting treatment programmes free of drugs."
The global war on drugs is fuelling a hepatitis C pandemic causing millions of needless infections, the Global Commission on Drug Policy has warned.