The watchdog said up to 400 people died needlessly at the hospital
A regulator has said it would not have awarded Foundation status to a hospital with "appalling" emergency care had it known it was being investigated.
NHS watchdogs said Staffordshire General Hospital put the bid for Foundation status ahead of patient care and up to 400 people died needlessly.
The Healthcare Commission said Monitor, which approved the bid, had not asked if there were concerns about the trust.
Health Secretary Alan Johnson has apologised and launched an inquiry.
He said he had asked the National Clinical Director for Emergency Care, Professor Sir George Alberti, to lead an independent review of the hospital's procedures for emergency admissions and treatment.
He added that Dr David Colin-Thome, National Clinical Director for Primary Care, would review the circumstances surrounding the trust prior to the Healthcare Commission's investigation.
Alan Johnson says there were 'astonishing failures at every level'
Speaking in the House of Commons, Prime Minister Gordon Brown said the government apologised to people affected by the "unacceptable" mistakes.
He confirmed that individual reviews of case notes would be undertaken if requested and added that standards within the trust "fall far short of the standards that people expect".
Managers at Mid Staffordshire Hospitals NHS Foundation Trust have meanwhile pledged to review 3,200 patient cases in the accident and emergency department.
The trust's chairman Toni Brisby resigned ahead of the report and chief executive Martin Yeates is suspended on full pay pending an inquiry.
The Healthcare Commission said it began investigating the hospital, in Stafford, in April 2008 after complaints from residents were backed up by statistics showing a high death rate.
William Moyes, chairman of Monitor, which regulates Foundation trusts, said it had not been aware of complaints when it considered the trust's application.
It approved Foundation Status for the trust in February 2008 when the Healthcare Commission had already received seven alerts.
The trust's foundation status was approved in February 2008
Mr Moyes said: "Nothing was drawn to our attention at the time.
"We talked to a lot of people and we asked for a lot of expert opinion and no-one suggested to us at the time that there was anything other than a problem with the way deaths were coded at the hospital.
"It's an appalling report and I don't for a minute minimise it."
Mr Moyes said that had the regulator been aware of the hospital's failings, or the fact that the Healthcare Commission was planning an investigation, it would have "paused and made sure that these failings were rectified before we proceeded with the assessment".
He added: "But we've put in new leadership and I'm absolutely confident that the new leadership will turn the hospital around."
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