The former Trade and Industry Secretary, who resigned in December, said a joint parliamentary committee on its own, as proposed in the Labour Party manifesto, would have been at the "risk" of falling victim to "rather incestuous and introspective proceedings.
"I was the lonely voice on the original cabinet committee urging the creation of a Royal Commission," he said. "I did so because I was concerned that to set up a joint parliamentary committee would result in rather incestuous and introspective proceedings."
He added that the joint parliamentary committee's work before the recommendations of the Royal Commission were published would have become a "playground for the Opposition".
Later, government sources expressed surprise at Mr Mandelson's remarks, saying usually proceedings in cabinet committees remained private.
Mr Mandelson defended the Government's decision not to reform the upper chamber all at once, saying it would have become "bogged down by the insistence that everything is clarified before we make any changes".
He stressed a future upper chamber should not demote the Commons because this would lead to gridlock and constitutional stalemate, "damaging democracy rather than enhancing democracy".
Its functions should contribute to provide the "much needed glue" to keep Britain together at the time of devolution by reflecting the new regional structures. Similarly it should address the remoteness and lack of legitimacy of the political institutions of the European Union. "If we could create a link between national Parliaments and the European Parliament, this would help to overcome that slight gulf that has opened up."
Earlier Sir Edward Heath broke ranks with William Hague by calling for the outright abolition of the hereditary principle and called for the hereditary Upper Chamber to be replaced by a fully elected House of Lords.
"I want to see the abolition of the hereditary principle. It is over. We should move on to a democratic arrangement. It must be elected today. This will cause some astonishment - I hear a great gasp of breath," he said.
"I believe the time has come for the end of hereditary peers in politics. I believe that with absolute conviction. We have now moved to the stage, about to go into the next millennium, and it is time it came to an end."
John Major, the former prime minister, seized upon Mr Mandelson's remarks. "Not since Satan denounced sin have I heard such a recantation as those remarks about devolution," he said.
Mr Major, MP for Huntingdon, said that the Bill was a "vindictive" measure that proved the Government was determined to remove all dissent against it. Mr Major agreed that the hereditary principle was "dead" but warned that the Royal Commission needed more time to come up with a sensible plan for a reformed Upper House.
The Government's "mean, inadequate little Bill" was part of a wider contempt for Parliament and its traditions that the Government also showed for its own backbenchers.
"This House should remember that it is the master of government and not its servant. The real question that lies behind all the constitutional change," he said.
"Liberty needs protection from democracy and this government are tearing apart, piece by piece, Act by Act, the most sophisticated constitution of them all with little understanding of what they are doing."