Mr Joyce said given the fighting in Afghanistan, victory would be "Pyrrhic"
Armed Forces Minister Bill Rammell has defended the government's decision to appeal against compensation given to two wounded soldiers.
He said accepting the payouts would have been "unfair and disadvantaging" to more seriously injured personnel.
Earlier, defence aide and Labour MP Eric Joyce said the appeals were "profoundly wrong" and should be ended.
Mr Rammell has also defended the UK's strategy in Afghanistan and said the military campaign must continue.
The MoD has brought forward a review of soldiers' compensation.
Downing Street said on Monday that the Court of Appeal action involving Cpl Anthony Duncan and Royal Marine Matthew McWilliams was "ongoing".
Cpl Duncan was initially awarded £9,250 after being shot, and Marine McWilliams received £8,250 for fracturing his thigh on a training exercise, before they appealed to a tribunal for further compensation.
Both men argued they had suffered a number of subsequent health problems during their treatment and these should not be regarded as separate from their original injuries.
But the MoD insists it should not be forced to pay out for complications and Mr Rammell said that doing so would breach "the crucial principle that the most compensation should go to those most seriously injured".
'Abdication of responsibility'
He told the BBC: "Look, if this were about money then the government wouldn't have doubled the maximum payout in compensation as we did just last year.
"Those are not the actions of a government which is resigning from its responsibilities.
"But I repeat, had we accepted the tribunal ruling we would have been unfair and disadvantaging our most seriously injured personnel and it would have been an abdication of responsibility to go down that route."
Writing in Scotland on Sunday, Mr Joyce, parliamentary private secretary to Defence Secretary Bob Ainsworth, said that although technically the MoD had a good chance of winning, the appeal should be dropped.
Succeeding would be a victory for "bureaucracy over bravery," he said.
BBC political correspondent Carole Walker said government sources have indicated Mr Joyce will not lose his job, although his comments undoubtedly add to the already considerable pressure on the MoD.
'Huge public outcry'
Falklands War veteran Simon Weston told the BBC the soldiers' treatment had been "appalling".
"What you have to ask yourself is, 'Why do people who have put their life on the line to do the bidding of this government then have to come back, cap in hand, and beg and fight and argue
to try to get what they justly deserve?'" he said.
"What this is really about is trying to save money for the future.
"What it's about is not being able to claim, stopping other people claiming, because of long-term [financial] problems that could occur [for the MoD]."
Mr Weston downplayed the government's claim to have doubled compensation, saying it was only done because of a "huge public outcry".
The review of the compensation scheme will involve consultation with legal experts, service charities and troops and their families.
General Sir Mike Jackson, who was head of the Army when British troops went into Helmand province in 2006, has called for it to be independent.
He told the BBC: "The difficulty with the MoD is that on the one hand you have, dare I say it, the civil side of the MoD perhaps with costs as their first concern.
"You have the military side of the MoD with the welfare of the soldiers their first concern. These two things are not always in harmony."
In a speech later at the Royal United Services Institute in London, Mr Rammell reiterated his insistence that British troops were fighting in Afghanistan to stop al-Qaeda getting a firm foothold in the border area with Pakistan.
He said: "For Britain to be secure Afghanistan needs to be secure; Pakistan needs to be secure.
"We are fighting the insurgents now in Afghanistan because the return of the hardcore irreconcilable Taliban would give al-Qaeda greater freedom to operate - freedom to plan, to direct and to provide support for more terrorist attacks."
Mr Rammell said the recent summer offensive in central Helmand province, Operation Panther's Claw, had been a success.
"We have inflicted heavy losses on the insurgents, decimating their command and control structure, weakening their resolve, and splitting them up," he said.