"It was, in fact, the case that he received his honour for services to banking but no doubt his contribution to the Prince's Trust would also have been taken into account."
Commenting on Ms Harman's gaffe, Elfyn Llwyd said: "Either it's gross incompetence or it was some sort of wide-eyed idea of misleading quietly.
"But clearly she got it completely wrong and that is not a very good quality for someone who hopes one day to lead the Labour Party."
Ms Harman had been led by "her own particular prejudices in this regard" and a desire to defend the government's decision to recommend Sir Fred for an honour, he suggested.
Shadow Commons leader, Alan Duncan, for the Conservatives, also joined in with criticism of Ms Harman.
He said "Once again, in her eagerness to hide Labour's cosy relationship with Sir Fred Goodwin and his government-endorsed perks, Harriet Harman has ignored the facts.
"Instead of worrying so much about her campaign to succeed Gordon Brown, she should focus on mastering the detail."
In June 2004, when Frederick Anderson Goodwin was knighted in the Queen's Birthday Honours List, there was no mention of his charity work in official Downing Street briefings.
The prime minister's official spokesman said Sir Fred "undertook many challenging projects that benefited both his company and the Scottish economy as a whole".
The knighthood, which is reported to have been on Gordon Brown's personal recommendation, came months after Sir Fred led RBS to a record annual profit of £6.2bn.
But the honour was attacked at the time by trade unions who branded him a "fat cat" for accepting a £900,000 bonus on top of his then annual salary of £1m.
Sir Fred has reportedly been forced to step down as head of the Prince's Trust after six years. He will quit as chairman in June.
He has also faced calls to be stripped of his knighthood, with more than 800 people signing a petition on the Downing Street website.
Ms Harman told MPs at prime minsters' questions the government was taking "all steps" to challenge the enforceability of Sir Fred's pension contract.
She said UK Financial Investments (UKFI), the body set up to manage the taxpayers' interests in the part-nationalised banks, had been asked to investigate Sir Fred's contract.
At the weekend, Ms Harman hinted the law may be changed to prevent Sir Fred collecting the money, saying the contract may be legally enforceable but was "not enforceable in the court of public opinion".
But Liberal Democrat deputy leader Vince Cable said the government should use existing legislation to strip Sir Fred as opposed to her "rather eccentric proposal for a 'Harriet's Law'".
Mr Cable told Ms Harman there was "growing anger in what you called the court of public opinion" about "lavish and generous pensions" not just for bankers but for "fat cats" in the public sector including Whitehall mandarins and ministers.
Earlier in the session, acting Conservative leader William Hague taunted Ms Harman about her alleged Labour leadership ambitions saying "this could be her moment".
To howls of laughter from Tory MPs, Mr Hague compared Labour's deputy leader to Churchill, who stepped in when his party lost confidence in its leader.
He also invoked Harold Macmillan, who took over from Anthony Eden.
Ms Harman, standing in for Gordon Brown at prime ministers' questions, accused Mr Hague of focusing on "gossip".
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