The admissions were made to MPs during oral evidence given to the Commons defence select committee which is examining Gulf War syndrome.
Nicholas Soames, the armed forces minister, admitted on Tuesday that Parliament had been misled over the use of organophosphate chemicals in the Gulf. He announced a pounds 1.3 million study to investigate illnesses suffered by Gulf veterans.
The committee was told by Dr Edgar Buckley, assistant under secretary at the MoD, that an investigation into the action of staff who caused ministers to mislead Parliament would report in February.
"We were not just misleading Parliament, we were misleading ourselves, he said. "There are prima facie grounds for concern that something seriously went wrong." Following discovery of the error, Group Captain Bill Coker, who headed the Gulf medical assessment team until last month, reviewed more than 800 sets of medical notes to look for veterans who might be suffering from organophosphate poisoning.
Fifty-four veterans have been recalled and are being re-examined by the medical assessment team before going for sophisticated tests at the Institute of Neurology. Group Capt Coker revealed two of the 10 people who dusted Iraqi prisoners with delousing powder were ill. He also disclosed that 20 per cent of the veterans examined - almost 200 - have symptoms that cannot be explained.
"It is this group that presents the greatest problem," he said. "If you want to apply the term syndrome, you could to this group." Michael Colvin, the committee chairman, said there were deep concerns about the length of time investigations into the health of Gulf veterans have taken so far.
He underlined anxieties that the pounds 1.3 million study would take a further three years. "There are some people who may well be dead before the results of the survey are known and that is totally unacceptable," he said.
Bruce George, the deputy chairman, said: "This money hardly amounts to a row of beans. It is not remotely commensurate to the suffering and the problems created - and ignored - by the Ministry of Defence."
He asked Mr Buckley to pass on a request that ministers should "cut their losses" and make an interim compensation payment to veterans.