A change in guidance for border officials created an "amnesty" for asylum seekers, MPs have said.
The UK Border Agency's target of clearing the historic backlog of 450,000 cases by this summer "seems to have been achieved largely through increasing resort to grants of permission to stay", a report found.
Keith Vaz, chairman of the Commons Home Affairs Select Committee, said it was clear the agency was "still not fit for purpose".
Four out of 10 of the cases that have been concluded led to the asylum seeker being allowed to stay in the UK, figures showed.
To clear the backlog, guidance was revised to allow officials to consider granting leave to remain to applicants who had been in the UK for between six and eight years, as opposed to the 10-12 years that applied at the start of the backlog-clearing process, the MPs said.
Some 403,500 cases were concluded, with just 38,000 (9%) having their claims rejected and being removed from the UK. But 161,000 (40%) were granted leave to remain, "such a large proportion that it amounts in effect to an amnesty", the committee said.
Some 74,500 other cases have been sent to the controlled archive "signifying that the applicant cannot be found and the agency has no idea whether or not the applicant remains in the UK, legally or otherwise". In one in six cases, the UKBA "has been completely unable to trace what has happened to the applicant", the MPs said.
Mr Vaz said: "Though progress has been made, it is clear that the UK Border Agency is still not fit for purpose. While there is no doubt that individual caseworkers are dedicated and hard-working, there are serious concerns over the agency's ability to deal with cases and respond to intelligence swiftly and thoroughly."
But Immigration Minister Damian Green denied there was any amnesty for asylum seekers: "There's absolutely no amnesty," he said. "What we've done is get through to the bottom of that huge problem we inherited. The main thing is we've now eliminated this backlog from the system so we can now get on with the everyday job that the previous government couldn't because they had that backlog."
He added that exit checks would be brought back by 2015.
