Despite going down 2-1 in the series to the world champion Springboks, Dallaglio reckons Paul O'Connell's men played better even than his triumphant team of 1997.
Speaking to the Rugby World magazine, triple Lion Dallaglio said he was delighted with the way the side played in South Africa and said he was gripped by the three Tests.
"You couldn't fault the organisation, the tactics or the spirit. The 2009 Lions played the best rugby of any Lions side since 1974," said Dallaglio.
"The quality of the rugby was outstanding and you have to admire South Africa's sheer iron will to win. Knowing the coaches as I do, I knew we would be competitive as they get the best out of the players.
"They were three of the most compelling Tests I've seen for some time and, as a Lions supporter, you were left feeling proud. But there was also a sense of what might have been had we got some luck or a few things went right.
"The players will rue the first 20 minutes of the first Test - that is where we lost the rubber. They did well to recover and, though we lost, we could have won 3-0."
Even though the Lions Test teams were dominated by Magners League players - 11 in the first Test, 13 in the second and 10 in the third - Dallaglio still thinks it will be England who will benefit the most from the 2009 Lions tour,
"Historically, the Six Nations after a Lions tour has been a poor one for England as they have contributed so many players to the Lions cause," claimed Dallaglio.
"That pressure will be on the Celtic nations this time as a Lions tour takes a lot of recovering from. I think England have the most to gain from what was an incredible Lions tour.
"While Wales and Ireland were severely depleted by the trip, Martin Johnson had the comfort of going away with many of his first-choice players and some of the next generation on England's summer tour.
"That should put England in a strong position. The Lions tour put down a massive challenge to English rugby because before the final Test we were looking at a Lions sides with a small number of Englishmen.
"If I was a member of Martin's squad I'd want to redress the balance. I'd want to prove that England are a force in world rugby."