Defence Secretary Sir Michael Fallon faced claims that ministers were more concerned about avoiding the UK being dragged to the International Criminal Court (ICC) than protecting British troops from the "out of control" inquiry into alleged abuse in Iraq.
Sir Michael acknowledged the Iraq Historical Allegations Team (Ihat) process was "very frustrating" and had been abused on an "industrial scale", but stressed that claims of criminal behaviour had to be properly investigated.
But former Army officer and Tory MP Johnny Mercer, who is leading a parliamentary inquiry into Ihat, said there were "fundamental flaws" in the process and service personnel who had suffered "horrific" experiences should be the priority.
Sir Michael said 3,392 claims had been received by Ihat but around half had been dismissed and by mid-2017 only the 60 most serious cases would be left to be examined.
The Defence Secretary said: "The vast majority of our servicemen and women carry out their jobs with great professionalism. Nearly 150,000 British troops served in Iraq between 2003 and 2011.
"However, Parliament itself has required that where there are allegations of criminal behaviour, Parliament - through the Armed Forces Act 2006 - has required that they be properly investigated. That is the origin of the Ihat system."
The inquiry has been mired in controversy, including over the involvement of now defunct law firm Public Interest Lawyers (PIL).
It emerged the Ministry of Defence paid the law firm more than £200,000 this year while it was being investigated over a string of misconduct allegations.
Ihat continued to pay PIL while an investigation by the Solicitors Regulation Authority (SRA) - which followed a complaint from the Government - was under way.
PIL leader Phil Shiner accepted he would be struck off last week after admitting acting without integrity, including by making "unsolicited direct approaches" to potential clients through a fixer.
Ihat paid PIL almost £210,000 this year, Mr Mercer said.
"There were payments authorised before this year to Public Interest Lawyers that were then paid this year," he said.
"Let's be very clear: Public Interest Lawyers would not have been dismantled in the way they have if we had not compiled a dossier about some of these abuses and sent it to the Solicitors Regulation Authority."
Mr Mercer, chairman of the Defence Select Committee's investigation into Ihat, told Sir Michael: "I know that you have, personally, worked really hard to close this down. I know that. But it's very hard for us to accept that we can come to this House and talk about hand-wringing about lawyers and so on, and we have been part of this process.
"I understand that this process has been exploited but the Government has paid into this process. That was a decision first made in 2011, that was not a court order. That was a decision by Ihat that we could not do this without Public Interest Lawyers.
"So we have paid them all this money and then slammed them in public. To servicemen and women it comes across that your priority is to the ICC whereas really our priority is to these guys who have served and their experiences have been horrific.
"For me it does genuinely feel that that hasn't really registered yet."
Sir Michael replied: "We need to be clear that where there are allegations of criminal behaviour by the armed forces, Parliament has decreed that they should be properly investigated by the service justice system. That's not Government, not the minister, parliament - you - have decided that in the Armed Forces Act 2006."
The process had been "complicated" by a European Court of Human Rights judgment on the detention of suspects and had been "abused by the industrial scale" of allegations.
"All of that is very frustrating and is not something any of us in this room would want to see repeated," the Defence Secretary said.
Mr Mercer said Ihat was a "poisoned well" and suggested a new organisation should be found to investigate the remaining 60 cases that are expected to be identified by the middle of 2017.
Sir Michael said: "I am prepared to look at the best way of dealing with the 60 final investigations. If there is a better way of doing that, I have got an open mind on that."
Another member of the Commons Defence Committee challenged Sir Michael and Chief of the Defence Staff Air Chief Marshal Sir Stuart Peach about Ihat investigators spying on potential suspects.
The head of the armed forces said: "Covert surveillance is part of the law and as long as the investigation is carried out in accordance with the law, that is proper practice."
Labour MP Madeleine Moon said: "I find that incredible because we have a situation here where we know that PIL have been involved in paying witnesses, we know that people have impersonated police officers, we know that people have been treated as suspects when in fact they are witnesses - we know all of this and yet you still are not condemning the use of covert surveillance."