Sir Keir Starmer claims he was "deliberately and repeatedly" kept in the dark over Mandelson's failure to pass security vetting checks before taking the role.
Starmer has blamed former top civil servant Sir Olly Robbins and said he would not have appointed Lord Mandelson if he had known the peer had failed the checks and insisted there was no pressure from No 10 to push through the high-profile appointment.
Sir Keir fired Sir Olly from his role as the Foreign Office's top official after finding out last week that Lord Mandelson had been granted security clearance despite failing the checks.
The Prime Minister faced accusations of lying to MPs by failing to set out the full picture around how Lord Mandelson was granted developed vetting (DV) status.
Reform UK MP Lee Anderson was first to be sent out of the House of Commons by Speaker Sir Lindsay Hoyle for accusing the Prime Minister of lying and refusing to withdraw it.
Mr Anderson, the MP for Ashfield, said: "The problem the Prime Minister's got is no one believes him. The public don't believe him. The MPs on this side of the House don't believe him. His own gullible backbenchers don't believe him.
"So does the Prime Minister agree with me, he's been lying?"
Sir Lindsay intervened to say: "Sorry, we don't use those words, and I'm sure the member's withdrawn it."
Mr Anderson replied: "Mr Speaker, I have the greatest respect for you and your office, but I will not withdraw it. That man couldn't lie straight in bed."
Sir Lindsay said: "Mr Anderson, you'll have to leave."
Lord Peter Mandelson taking his dog for a walk near his home in London. The Foreign Office's top civil servant Sir Olly Robbins left his post after it emerged the department had overruled a security vetting process to clear Lord Peter Mandelson to become UK ambassador to the US (Image: James Manning)
Zarah Sultana was later removed from the chamber by Sir Lindsay after she accused the Prime Minister of being a "bare-faced liar".
In a question, the Your Party MP (Coventry South) said: "We all know that the Prime Minister appointed Mandelson because he owes his job to him. He appointed him, he defended him, and now he claims to know nothing.
"He is gaslighting the nation. So let's call this out for what it is. The Prime Minister is a bare-faced liar."
Sir Lindsay said: "Leave now, I'll name you otherwise, I'd go now if I were you.
"I've given the option to name. I'd leave if I were you, very quickly."
Ms Sultana attempted to interject and said: "I have a duty to the House to tell the truth."
Sir Lindsay held a vote, brought by Government whip Gen Kitchen which said: "I beg to move that Zarah Sultana be suspended from the services of the House."
MPs voted in favour.
"Leave, I'm sorry you've done this, I really am," Sir Lindsay said
Prime Minister Sir Keir Starmer making a statement in the House of Commons, London, on security vetting (Image: House of Commons/UK Parliament/PA Wire)
Sir Keir Starmer has denied misleading the House of Commons.
"I accept that information that I should have had, and information that the House should have had should have been before the House, but I did not mislead the House, and that's why I've set out the account in full," he said.
He insisted he had been let down by officials, with Sir Olly claiming he was not allowed to share the information that the UK Security Vetting (UKSV) agency had declined to give the peer the green light.
The Prime Minister accepted responsibility for the decision to appoint Lord Mandelson, who was sacked after nine months in the job over his links with paedophile financier Jeffrey Epstein.
The architect of New Labour was a political appointment to the plum diplomatic role, rather than the Washington job going to a career diplomat.
Dame Emily Thornberry, Labour chairwoman of the Commons Foreign Affairs Committee, said: "I am afraid to say, doesn't this look like, for certain members of the Prime Minister's team, getting Peter Mandelson the job was a priority that overrode everything else and that security considerations were very much second order."
Sir Keir denied this, telling her it was "unforgivable" that the full information about Lord Mandelson's appointment had not been disclosed.
He said this "wasn't an oversight" but "a deliberate decision was taken to withhold that material from me" on repeated occasions by the Foreign Office.
The Prime Minister said Sir Olly's view was "that he couldn't provide this information to me because he wasn't allowed to", which No 10 has claimed is not correct.
Whitehall veteran Sir Olly will face MPs on the Foreign Affairs Committee on Tuesday to give his account.
Sir Keir said he challenged Sir Olly about why he went against the UKSV recommendation.
"I did ask him, and I didn't accept his explanation," Sir Keir said. "That's why I sacked him."
The Prime Minister said there were a series of occasions when the information could and should have been disclosed.