So many asylum seekers have been given leave to remain in the UK that it "amounts to an amnesty", MPs have said.
Since 2006, the Home Affairs Committee said 40% of outstanding cases dealt with by the UK Border Agency (UKBA) led to individuals being allowed to stay.
It said the UKBA also had "no idea" what happened to tens of thousands of others whose cases had to be shelved.
Immigration Minister Damian Green said there was "absolutely no amnesty" and the system was "getting better".
Asylum is protection given by a country to someone who is fleeing persecution in their own country.
In 2006, the then Labour home secretary John - now Lord - Reid described the immigration system as "not fit for purpose" after it emerged there was a backlog of about 450,000 asylum cases which had not be dealt with, some dating back many years.
He vowed to tackle the problem and, after taking office last year, the coalition said it would clear the backlog by this summer.
But in a critical report, the cross-party Home Affairs Committee said the target "seems to have been achieved largely through increasing resort to grants of permission to stay", and by changing the rules to allow those grants to be given to applicants who had been in the UK for between six and eight years - rather than 10 to 12 years previously.
So far 403,500 applications from the backlog have been fully processed. Of those, only 38,000 were rejected compared with 161,000 who were given permission to remain.
The latter was "such a large proportion that it amounts in effect to an amnesty", the MPs said.
Of the remaining 205,500 applications, 40,500 were effectively shelved simply because "the applicants cannot be found and it is unknown whether they are in the UK, have left the country or are dead" - an outcome MPs said was "indefensible".
The remainder are said to be duplicates and errors in the system.
Keith Vaz, the Labour MP who chairs the committee, said he "welcomed" the fact the backlog had been cleared but questioned the methods used.
"The problem with the UK Border Agency, which predates this government, is a lack of administrative control," he told Radio 4's Today. "It is an administrative issue rather than a political problem and we would like to see it resolved so the government can meet the targets it has set out."
But Mr Green said all cases had been considered on their merits and the number of people being granted leave to remain had not risen over the past year.
"Absolutely, there is no amnesty and the system is getting better now," he told Today.
Asked about the 40,500 cases where individuals could not be traced, he said he believed most had either left the country or died as they had not shown up on any government databases since then.
While the current asylum system was not perfect, he said it was hugely improved and 60% of applications were now dealt with within 30 days.
He added: "The number of applications we had is running at a 20-year low, we are spending £100m less of taxpayers' money on asylum support than we were two years ago. Finally, after years of chaos and shambles we inherited, the asylum system is getting back to some kind of health and stability."
Campaigners for lower immigration levels said the report suggested the "green light was being given" to illegal incomers.
"The removal of those people who overstay their visas and no longer have the right to be in the country is absolutely essential to the credibility of the whole system," said Andrew Green, chairman of Migration Watch UK. "This report suggests that the removal effort is much too feeble."
But Keith Best, former chief executive of the Immigration Advisory Service, said many of the applicants had simply been "forgotten about" and "left in limbo" by the authorities.
And the Refugee Council said allowing many asylum seekers to remain in the UK was the "humane" thing to do given their circumstances.
"Many will have settled down with families and made strong bonds with their local communities while it has been unsafe to return to their own countries," said the organisation's Jonathan Ellis.
Labour said the UKBA's efforts were being undermined by cuts in its funding which would reduce staff levels by 5,000.
According to Home Office statistics, the number of people granted asylum in the UK rose every year between 2004 and 2008 before falling in 2009.
During last year's election campaign, David Cameron attacked what he said were Lib Dem proposals for an amnesty for illegal immigrants who had been living in the UK for a certain amount of time - although the Lib Dems said this misrepresented their position.
The coalition has continued Labour's ban on low-skilled workers from outside Europe, but has also introduced a cap on non-EU skilled workers as part of a pledge to bring net migration down to "tens of thousands" by the end of the Parliament.