A discredited £60m Government investigation into allegations against Iraq war veterans will be shut down within months, the Defence Secretary has announced after pressure from MPs.

The Iraq Historic Allegations Team (IHAT) will close in the summer and around 20 cases will be dealt with by the Royal Navy Police, Sir Michael Fallon said.

It comes after a scathing report by the Defence Subcommittee said the investigation had subjected serving and retired troops to “deeply disturbing” treatment and had “directly harmed” UK defences.

MPs set out a litany of failures about the way the Ministry of Defence, which created IHAT, has handled the probe.

They blamed the department for empowering law firms to generate cases that lacked credibility on an “industrial scale”.

And they criticised it for “serious” failings after it handed over more than £110,829 to Abu Jamal, an Iraqi middleman, while he was employed by Public Interest Lawyers (PIL), the defunct firm behind many of the claims.

Phil Shiner, who ran PIL, has been struck off after being found to have acted dishonestly in bringing murder and torture claims against Iraq war veterans.

The committee said it was “deeply concerned” the MoD had used public funds to cover the costs of those who were bringing “spurious and unassessed” cases against the war veterans and about the lack of support for those accused.

IHAT investigators used “intimidatory tactics”, including “deeply disturbing” methods such as impersonating the police. Serving and retired soldiers have also been spied on, the report found.

The damning report said the catalogue of serious failings in IHAT's conduct pointed to a loss of control in its management.

It added: “Both the MoD and IHAT have focused too much on satisfying the accusers and too little on defending those under investigation.”

IHAT was set up by Labour in 2010 to assess claims of abuse by Iraqi civilians against troops who had served there.

It started out with 165 cases but the allegations rocketed. Most were generated by two law firms, PIL and Leigh Day.

The report said: “It is clear to us that legal firms were empowered by the MoD's approach to IHAT to generate cases against service personnel at an industrial level. The MoD cannot claim that it has been a victim of the industry; nor can it claim that it had no way of foreseeing the creation of this industry.”

The Government said it had not been able to shut down IHAT sooner because the conduct of the investigations was under scrutiny by the High Court and the International Criminal Court.

Sir Michael said: “It was the MoD that supplied the main evidence that got Phil Shiner struck off for making false allegations against our armed forces. Exposing his dishonesty means many more claims he made can now be thrown out and the beginning of the end for IHAT.

“This will be a relief for our soldiers who have had allegations hanging over them for too long. Now we are taking action to stop such abuse of our legal system from happening again.”

MPs were told that the war veterans had been “hung out to dry”, with one becoming a recluse, because there had been a lack of military support.

“While the cost to the taxpayer is significant, the psychological and actual cost to individual soldiers is arguably greater,” the report says.

“Their lives have been put on hold and their careers damaged, sometimes for years, because of allegations made against them - in many cases without any credible supporting evidence. The effects of this on the British military are profound and enduring.”

The Defence Subcommittee inquiry, chaired by former army captain Johnny Mercer, said Iraq veterans had been treated in an "unacceptable manner as a result of serving the United Kingdom".

“Throughout this process there has been an almost total disregard of the welfare of soldiers and their families,” the Conservative MP said.

“We need to hold our people in the highest esteem and a repeat of IHAT must never be allowed to happen again.

“The MoD must take responsibility for allowing this to happen. They could have discriminated between credible and non-credible cases yet they lacked the will to do so.”

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Chief of the General Staff General Sir Nicholas Carter said: “The army’s leadership code requires the highest values and standards. It is right therefore that on the occasions that there are credible allegations of unacceptable behaviour they should be investigated.

“However, a significant number of claims made against our soldiers have not been credible. The recent exposure of unscrupulous law firms and vexatious claims has clearly shown this to be the case.

“Mutual trust is at the heart of the army leadership code as is the care of soldiers and their families.