Eight new helicopters worth £259m are grounded due to a "botched" procurement, a study by the National Audit Office has said.
The Chinooks were meant to be in service in 1998
The Chinook helicopters could be a risk to fly in cloudy weather because the software which enables them to do this cannot be properly tested.
Fixing the problem will cost an estimated £127m and the Chinooks will remain grounded until at least 2007.
The study says the armed forces are a third below battlefield capacity.
The Ministry of Defence admits, on current plans, that the shortfall will not be made good until 2017-2018.
The Chinooks were originally supposed to be in service in 1998 but radar systems and software developed under a separate contract would not fit in the cockpit, the report said.
They are now restricted to flying above 500ft in cloudless skies, with pilots using landmarks on the ground to navigate, and can only be used on limited trial flights.
Chinooks are used for ferrying troops, artillery and supplies to and from the battlefield.
Tory MP Edward Leigh, chairman of the influential House of Commons Public Accounts Committee, said the Chinook contract was "one of the most
incompetent procurements of all time".
He added: "They can just get off the ground but cannot fly enough to be useful."
Lord Bach, the minister for defence procurement, told BBC Radio 4's Today programme it was an "absolutely extraordinary" story and the MoD was considering its options.
REPORT'S KEY FINDINGS
Shortages in vital equipment such as nuclear,
biological and chemical protection for aircrew, communications technology and
Shortage of sand filters meant just 24 Lynx deployed in Iraq rather
than the required 33
Search-and-rescue helicopters under-resourced
for deployment overseas, so UK relies on US
military for rescuing personnel
Individual protection gear rushed to Army helicopter aircrew in
the run-up to the Iraq war, so "inadequate training and support"
When ordering the Chinooks, the MoD identified 100 "essential
elements" required for operation, but only 55 specified in
But the blame lay with the Conservative government because the contract was signed in 1995, he said.
"It is a bad contract and we are going to have to live with the consequences," he said.
A "smart acquisition" system introduced since then meant the risk of repeating the error was reduced, he said.
The system promotes buying and maintaining equipment that is effective but which costs less and can be delivered faster.
Liberal Democrat foreign affairs spokesman Sir Menzies Campbell said "smart procurement" was not working.
"There really has to be an attempt to get these large-scale procurement projects right," he said.
"It is not enough to go on saying we have the best
forces in the world, we have got to make sure that they are equipped to do the job."
The NAO has made a series of recommendations to help the MoD get the most out of its fleet while waiting for it to be brought back to full strength.
These include eliminating slippages in deliveries and streamlining training practices.
The NAO said Britain's battlefield fleet was nonetheless "arguably the most capable helicopter force in Europe" and recognised that "significant progress" had been made since the MoD's Joint Helicopter Command had been set up in 1999.
"However, more is to be done if the significant shortfall in helicopter
capability is not to limit operations in the future."
In a statement, the MoD said it acknowledged the shortfall.
"Much of that derives from increases in operational requirements that have
evolved over recent years," it said.
"The MoD is currently in the early stages of planning
the next generation of its battlefield helicopter capability, and is preparing
for significant investment in future platforms."