The home secretary has admitted the government operated an "unlawful" policy over the detention of scores of young asylum seekers.
The test case is expected to lead to a further 40 cases
John Reid's statement was issued during a High Court case in which children who were treated as adults were seeking damages for loss of liberty.
The government said its policy "did not strike the right balance".
It adds to Home Office problems with prison overcrowding, and the departure of the head of the Youth Justice Board.
The children, in four test cases, arrived unaccompanied in the UK saying they were under 18.
Alleged psychological damage
They were entitled to local authority care as those under 18 are considered vulnerable and should not be housed with adults.
Instead they were deemed by immigration officials to be over 18 and sent to adult detention centres where they were held for weeks.
It is alleged that some of them, who cannot be identified by court order, suffered psychological damage after being held with adults in inappropriate conditions.
Their treatment occurred before the policy changed in November 2005.
In a written statement to the High Court in London, lawyers for the Home Office said the policy was "unlawful".
"The Secretary of State has concluded that the approach to detention in disputed age cases, prior to a change in policy on November 30, 2005, did not strike the right balance between, on the one hand, the interests of firm and fair immigration control and, on the other hand, the importance of avoiding the detention of unaccompanied children, save in exceptional cases and limited circumstances."
Lawyers alleged that immigration officials "chose to ignore" a letter from one local authority stating that one of the children, a girl, was under 18.
Mark Scott, of lawyers Bhatt Murphy, said: "Unaccompanied children as young as 14 have been detained with adults and subjected to inappropriate behaviour by staff and other detainees.
"Some have been detained for long periods of time - the longest we know of being 87 days."
At least another 40 cases are expected to follow the test cases, with human rights lawyers saying the final numbers seeking compensation could top 100.
The revised policy accepts that a person in under 18 unless there is "credible and clear documentary evidence" that a claimant is not, or an age assessment carried out by social services states a person is 18 or over.
A person is considered over 18 if their physical appearance or demeanour "very strongly" indicates they are "significantly over 18" and no other credible evidence exists to the contrary.
Judith Dennis of the Refugee Council called for more scrutiny of immigration detention - saying the story had only come to light because of the work of independent organisations.
"Age-disputed children can be detained as the result of initial decisions by immigration officers before child care professionals have had a chance to conduct even a brief assessment of how old they are," she said.
"Unfortunately, there still are children in adult detention facilities and we urge the Home Office to ensure that its new policy, which is more sensitive to child protection issues, is carried out in practice by all staff.
"This problem wouldn't have come to light without evidence from independent bodies working in detention centres, in particular Refugee Council staff at the Oakington Centre in Cambridgeshire. This highlights the need for independent welfare teams in all detention centres."