General Sir Robert Ford wrote a memo shortly before Bloody Sunday in Londonderry which said some rioters might have to be shot to restore law and order in the city.
However, he told the inquiry on Tuesday that it was just an initial idea which would have needed government clearance to be carried out.
The Saville Inquiry is investigating the circumstances of the shooting of civilians at a civil rights march by British soldiers on 30 January 1972. Thirteen men and boys were killed and a 14th man died later.
'Observer'
In a written statement to the Saville Inquiry, General Ford said the reference to shooting a few rioters was not a suggestion to kill them - "as shoot and kill were different words".
And he said there was "no question of implementing such a policy".
As Commander of Land Forces, General Ford was responsible for the day-to-day conduct of army operations throughout Northern Ireland.
He also told the inquiry that he was in Derry on Bloody Sunday only as an observer.
He added he did not put pressure on the local army brigadier to send the parachute regiment into the Bogside to arrest rioters.
But three weeks before Bloody Sunday, after meeting shop traders in Derry, he wrote a personal and confidential memo to the Northern Ireland General Officer Commanding, Sir Harry Tuzo.
In it, General Ford said he was "coming to the conclusion that it might be necessary to shoot selected ringleaders of the rioters after clear warnings had been issued".
General Ford is expected to give evidence over a two week period.
As he is now aged 78 he will only testify in the mornings.
Second inquiry
The inquiry has been sitting in Derry for the last two years, but was moved to London to hear evidence from military witnesses following court action in which they argued they could be targeted by dissident republicans if they had to travel to Northern Ireland.
The Army has always maintained that it was fired on by IRA gunmen before it opened fire and this view was upheld by the Widgery Inquiry, held shortly after the shootings.
The relatives of those killed and injured have always denied that the Army were fired on before they opened fire.
The Saville Inquiry was set up by Prime Minister Tony Blair to reinvestigate the evidence because the relatives felt the first inquiry was a whitewash.
Lord Saville and the Commonwealth judges who comprise the inquiry, are not expected to report back until 2004.