The BBC has been accused by MPs of misleading parliament over its "catastrophic" Digital Media Initiative (DMI), which was axed last month after wasting nearly £100m of licence-fee-payer's money.

MPs on the Commons public accounts committee (PAC) said the BBC and its former director general, Mark Thompson, gave evidence to parliament in 2011 that "just wasn't true".

In a hearing held on Monday at BBC North's MediaCityUK headquarters in Salford, BBC trustee Anthony Fry admitted DMI had been a "complete catastrophe". He said: "It is extraordinarily worrying. At a personal level it is probably the most serious, embarrassing thing I have ever seen."

The flagship project, which was designed to do away with videotapes and digitise BBC archive content, was eventually axed on 24 May after costing the BBC £98.4m. The National Audit Office (NAO) and accountancy firm PricewaterhouseCoopers, on behalf of the BBC, are conducting separate investigations into the project's failure.

Thompson, now chief executive of the New York Times Company, is expected to be recalled to parliament to explain why he told MPs in February 2011 that DMI was "out in the business", that there were "many programmes being made with DMI" and that it had contributed to on-air broadcasts.

Margaret Hodge, chair of the PAC, said: "The thing that really shook me is we were told there were bits of this system that were working, you were using and running programmes with them, and that wasn't true. That just wasn't true."

She cited a letter sent to the BBC Trust in May last year by Bill Garrett, an ex-head of technology for BBC Vision, who described Thompson's evidence to parliament and the NAO report in 2011 as "exceedingly misleading".

Hodge said: "Both the NAO report and the evidence from the BBC suggested that DMI was delivering in practice. What the letter from Bill Garrett goes on to say is that the reality is at odds with the representation given in the NAO report … So Mr Thompson told us that things were already being used because of this great agile project; then Mr Garrett told us that was not true ...

"Therefore the evidence given to us was not correct at that time and had you given us the correct evidence we might have come to a very different view to the one we came to when we looked at this."

Hodge added that more that one serving BBC manager was to blame for the project's failure and questioned why only one – the chief technology officer, John Linwood – had been suspended.

"Never let it be said that I'm a conspiracy theorist: This is more than one individual to get to that stage where there are assertions at committee – we gave you a green light on information. I know you've suspended one individual – but my conspiracy theory would be that there is more than one involved," she said.

The Tory MP Stewart Jackson said he was embarrassed to read back a PAC press release from 2011 that praised the corporation's handling of DMI. He said it showed "the extent to which we were misled".

Fry, who announced that DMI had been axed in a letter to the PAC in May, said he believed there was a feeling in BBC management in 2011 that it could "walk on water" after the success of the iPlayer.

Before Linwood, the project was led by Erik Huggers, the ex-director of BBC future, media and technology, ultimately reporting to Caroline Thomson, the corporation's former chief operating officer. Thomson, who left the BBC in September with a £670,000 payout, has agreed to give evidence to the corporation review being conducted by PwC. This review is likely to report in September, Fry said.

A BBC spokesman said: "The BBC takes seriously its responsibility to provide the NAO and public accounts committee with the most accurate information at all times. As has been made clear the BBC will now be doing all it can to assist the independent review of the DMI project."

Earlier in the two-hour hearing, Fry admitted licence fee payers would be "aggravated" or "at the very least have raised eyebrows" that 11 unnamed BBC employees were awarded £100,000 each to relocate to MediaCityUK, which opened as the headquarters of BBC North in 2012.

Hodge praised the smooth running of the transfer of several hundred staff from London to Salford as "efficient and viewers haven't notice it".