Daniel disappeared while waiting for a bus at Woombye, five kilometres south of Nambour, in December 2003.
The inquest has heard detectives started investigating a known pedophile from Goodna soon after Daniel disappeared.
The man, referred to as P5 in the inquest being held in Maroochydore Coroners Court, was jailed for eight years for abducting and assaulting a boy in Gladstone in the 1990s.
He was released from jail on November 7, 2003, one month before Daniel disappeared.
Detective Senior Constable Ross Hutton read out a letter in the inquest sent to P5 in prison that was intercepted by police.
The letter said the writer was haunted by Daniel's picture and that the person was "going off my head for what we've done to him".
"I have to clear my conscious. I will go to police soon," the letter read. "You're in jail now, what does it matter if you stay there. You killed the poor kid, his parents need to know."
P5 is behind bars for an offence against his sister.
Snr Const Hutton said P5 was investigated because of his criminal history, his association with the Sunshine Coast and because he drove a blue car, the same colour as the one thought to have been used in Daniel's abduction.
The inquest heard P5 told police he was at home in Goodna the day Daniel disappeared.
Phone records showed a three-hour window of opportunity to commit the crime but doubts were raised about whether he could drive to Woombye and back in that time.