The Attorney General has rejected calls for an appeal or judicial review of the case against John Downey over the Hyde Park bombing as there was "no prospect" of it being successful.
Dominic Grieve told the House of Commons that 38 letters have been sent to terrorist suspects since 2010 telling them they will not face prosecution – although almost 200 people have received them in total.
David Cameron said the letter giving convicted IRA man Mr Downey a false assurance that he was not wanted by British police over the IRA's 1982 bomb attack should never have been sent and a rapid factual review would be carried out to make sure "this cannot happen again".
Mr Downey produced the letter after the Attorney General decided to prosecute, despite its existence.
"It was right that the matter should be tested in court," Mr Grieve told the Commons.
"Neither I nor the Crown Prosecution Service were prepared to accept that the letter and the circumstances in which it was given were such as to automatically prevent Mr Downey's prosecution."
Mr Cameron told MPs Mr Downey should never have received the letter and said it was "absolutely shocking" that Downey was not going to be tried for the bombing.
"It was a dreadful mistake and a mistake that we now need to have a rapid factual review to make sure that this cannot happen again," he said.
"But whatever happens we have to stick to the principle that we are a country and a Government under the rule of law."
DUP deputy leader Nigel Dodds warned Westminster that the growing crisis was threatening to destabilise Northern Ireland.
He told Secretary of State Theresa Villiers the very future of Stormont's institutions had been thrown into doubt by the Government's actions.
Peter Hain, who was Secretary of State at the time when the letters 'scheme' began, said it was overseen by the law officers, and "an anomaly" that was part of the peace process.