Fifty-two innocent people were killed in the bombings
MI5 deceived MPs by claiming London's 7/7 bombers had not been identified before the attacks, a court has heard.
In May 2006 the Parliamentary Intelligence and Security Committee (ISC) said security agencies had not identified the men.
But a second ISC report in 2009 said MI5 held records relating to ringleader Mohammad Sidique Khan, the court heard.
The claims were made at a hearing to decide the format of inquests into the deaths of those killed in 2005.
Khan and three other suicide bombers killed themselves and 52 innocent people when they detonated their devices on three Tube trains and one bus.
The coroner, Lady Justice Hallett, is holding a three-day hearing at the Royal Courts of Justice in London to decide what form the inquests - expected to start in October - should take.
Lawyers for the families of those who died argue that they should include a broad-ranging investigation of whether the authorities could have prevented the attacks.
'Incapable of deception'
Patrick O'Connor QC, counsel for four of the bereaved families and 15 survivors, said: "The last time MI5 was accused of deception... the ceiling seemed to fall in, as if MI5 is incapable of deception.
"They aren't, and they deceived the ISC."
He went on: "MI5 left the ISC under this misunderstanding - and therefore the British public - for three years, thinking they had not identified Mohammad Sidique Khan before the 7/7 bombings."
He said the ISC's findings would be "deeply undermined" if MI5 had deliberately misled the committee.
Mr O'Connor strongly criticised MI5's involvement in the 7/7 case, saying the agency demonstrated flaws in its assessment policy, record-keeping and co-operation with other agencies.
Neil Garnham QC, counsel for the home secretary and MI5, urged the coroner not to examine how the security service dealt with the limited information it had about the bombers before the attacks.
He said: "The public interest would, we submit, not be served - in fact would be positively damaged - by attempts in these inquests to reinvestigate the matters that were before the ISC."
Mr Garnham also suggested that national security could be damaged if the inquests attempted to delve deeper into MI5's activities.
The hearing continues.