An aide to Defence Secretary Bob Ainsworth today urged him to drop his appeal against compensation awards to two injured servicemen.
Labour MP Eric Joyce said that while the Ministry of Defence stood a good chance of winning its court challenge, success would amount to "a victory for bureaucracy over bravery".
His comments came as the former chief of the British Army, General Sir Mike Jackson, branded the MoD's attempt to reduce the compensation award "virtually incredible.
Gen Jackson called for a review of the compensation system for injured troops to be transferred from the MoD to an independent body in order to restore public confidence.
The MoD last week went to the High Court to challenge tribunal rulings which increased the payouts to two soldiers who developed medical complications after treatment for their initial injuries.
Marine Matthew McWilliams broke a leg on a training exercise, and saw his payment increased from £8,250 to £28,750 to recognise problems which developed after his initial treatment.
And Corporal Anthony Duncan, of the Light Dragoons, was shot in the leg by a high-velocity round in Iraq in 2005 and won an increase in compensation from £9,250 to £46,000 after complications from surgery.
Mr Ainsworth said that action to challenge the tribunal decisions was necessary to protect the principle that those with the worst injuries should receive the largest payouts.
But he agreed to bring forward an internal MoD review of how the compensation system operates.
Judges are expected to deliver their decision in October.
Mr Joyce, a former Black Watch soldier who now serves as Parliamentary Private Secretary to Mr Ainsworth, told the Daily Telegraph that the Government should not take "a penny" from the two servicemen.
"A victory for the MoD in October at the Court of Appeal would represent a victory for bureaucracy over bravery," he told the paper.
"The appeal should be dropped."
He warned that the public would not respond well to the legal action, regardless of the merits of the MoD's case.
He said the public gives politicians "a lot of rope", but added "Where we get the moral call profoundly wrong on a matter of how we treat our astonishingly brave service personnel, we'll find ourselves dangling at the end of it."
Gen Jackson, the former Chief of General Staff, today attacked the decision to take legal action over the compensation issue and accused the MoD of a "penny-pinching" approach to the issue.
"I very much hope common sense and a proper regard to the soldiers, not this penny-pinching attitude, will prevail," he told Sky News' Sunday Live.
He warned that the planned MoD review of compensation would lack public confidence because it would have the Treasury "looking over its shoulder".
"This is going to be an in-house MoD review with the Treasury looking over their shoulder," he said.
"I think for the public confidence it would be much better done by an independent body."
Defence minister Bill Rammell told Sky News: "I defy anyone to say that we haven't been focused on delivering the most adequate compensation to our service personnel.
"We doubled the maximum compensation last year. These are not the actions of a Government that is prepared to neglect its armed forces."
He added: "The reason we appealed the decision of the tribunal is that it would have fundamentally breached the crucial principle that the most compensation should go to those most seriously injured.
"Had we not launched that appeal, I believe that the tribunal ruling, if it were allowed to stand, would be an injustice and would be unfair to those most seriously injured."
Shadow defence secretary Liam Fox said the Conservatives would await the results of the review before judging whether to accept its findings.
"We have to do what is right for those who are willing to risk life and limb for the country," he said.