A hospital now losing £44m a year was allowed to go ahead with a private finance deal to build new premises despite the Government being warned that the project was unsustainable.
A report, commissioned by the hospital regulator, Monitor, and seen by The Independent, reveals that strong concerns were raised that Peterborough Hospital would not have the money for the new buildings.
Despite the warning – to both the Treasury and the Department of Health – the go-ahead was given for the project, which is now costing the hospital trust £22m a year to service.
Last year, Monitor found Peterborough to be in "significant breach" of the terms of its authorisation and warned that work on a turnaround plan for the hospital had "not progressed at the necessary pace". In February, the Government was forced to establish a £1.5bn bailout fund to help pay the debts created by prohibitively expensive PFI schemes, of which Peterborough was one.
Peterborough is judged at high risk of financial failure by Monitor and is likely to have to cut or reconfigure the services it provides and make staff redundant to balance its books.
In the report, from the accountants KPMG, into what went wrong at Peterborough, auditors conclude that while Monitor was aware of the risks of the project it was powerless to stop the Government from giving it approval.
It is embarrassing for Labour because, at the time of the approval, Andy Burnham was a Minister of State in the Department of Health. He is now shadow Health Secretary.
The report reproduces a letter sent by the then head of Monitor, Bill Boyes, to the hospital trust in 2007 and copied to officials in both the Treasury and the Department of Health, warning of the dangers of the project.
But because Monitor had no power to intervene, it went ahead and it was only in 2010, after the hospital had been built, that the true financial picture emerged.
Yesterday it emerged that up to 30 NHS trusts could be forced to merge, devolve services into the community and make jobs cuts as part of a radical restructuring of hospital care – partly as a result of the cost of PFI.
The Department of Health said it considered 21 hospitals to be "clinically and financially unsustainable".
Commenting on the report, a Department of Health source said: "This was a disastrous Labour PFI blunder. Labour was warned repeatedly by their own regulator that this PFI deal could bankrupt Peterborough Hospital but they pressed on regardless."
A spokesman for Mr Burnham said he would not comment until he had seen the full published report.