Some asylum-seekers have been waiting 16 years for a decision on their claim, the Home Affairs select committee has found, in a damning report on the state of the UK asylum system.
The group of MPs raised concerns about the "appalling" housing conditions faced by asylum-seekers, as well as the pressure placed on gay applicants to prove their sexual orientation.
They also found Britain was at risk of harbouring war criminals and terrorists due to poor decisions made by border officials.
The committee said it was concerned by the quality of decision-making as 30% of appeals against initial decisions were allowed in 2012.
A backlog of 32,600 asylum cases that should have been resolved in 2011 are yet to be concluded, the committee discovered, while the number of applicants still waiting for an initial decision after six months rose by 63% last year. Some applicants had been waiting up to 16 years.
In 2012, there were 21,955 applications for asylum in the UK. Of those, 18,423 had received an initial decision and 12,632 had been concluded by 19 September this year.
This means that 3,523 people who applied for asylum in 2012 have yet to receive an initial decision.
Committee chairman Keith Vaz said: "The asylum system is overburdened and under severe pressure.
"The backlog of asylum cases that should have been cleared by 2011 has reached 32,600, with some people waiting up to 16 years for a decision.
"The system needs to work, otherwise applicants are trapped in a cycle of helplessness and vulnerability."
The committee's report also said it was concerned about decisions to grant asylum to people "who later emerge to be involved with terrorist activity".
Vaz said: "Those who apply for asylum should be checked against national and international law enforcement agency and security databases to ensure that we are not harbouring those who intend us harm.
"The Home Secretary has to assure us that any anomalies in the process, which have allowed decisions such as this to take place, are addressed immediately."
The report said the UN High Commissioner for Refugees (UNHCR) had identified a number of failings in the quality of the UK's asylum decision-making, including a failure to apply the correct methodology to assess an applicant's credibility.
The MPs said they were "alarmed" by the "sub-standard level of housing" provided to asylum applicants by private firms G4S, Serco and Clearel, as part of the Compass contract, a project launched in July 2009 to provide contracts for the provision of asylum support services.
Vaz said: "These companies must be held accountable and deliver a satisfactory level of service. It is unacceptable that in 21st century Britain thousands of people are forced into destitution due to the inefficiencies of the system."
The committee said it was concerned that the process for lesbian and gay applicants, many of whom are fleeing persecution in their home countries, relied too heavily on anecdotal evidence and "proving that they are gay".
This had led to claimants going to extreme lengths to meet the demands of the assessment, including handing over photographic and video evidence of "highly personal sexual activity" to caseworkers.
Jonathan Ellis, head of policy at the British Red Cross, which helps 10,000 refugees and asylum seekers in the UK every year, said: "It is encouraging the committee acknowledges there are unnecessary hurdles in the present system, but the levels of support for refugees are still not enough to meet their basic human needs.
"We see many vulnerable people suffering in appalling conditions because they simply do not have enough to survive on as they battle through the asylum process homelessness and hunger are the very real results of a system that is broken."
The chief executive of the Refugee Council, Maurice Wren, said: "The findings of this report reflect the grave concerns about the asylum system in the UK that we and many others have been highlighting for years.
"Failing to treat asylum seekers with dignity and, simultaneously, failing to deal effectively and fairly with their claims has created an expensive and counter-productive bureaucratic nightmare that all too often denies vulnerable people the protection from persecution and oppression they desperately need.
"In particular, the government should be ashamed that it has to be told by a parliamentary committee to stop forcing pregnant women to move around the country for bureaucratic convenience."
The Home Office said it took a range of measures to screen immigration applicants for potential involvement in terrorism and it was clear that convicted terrorists should not be granted asylum in Britain.
A Home Office spokesman said: "The UK has a proud history of granting asylum to those who need it. We are committed to concluding all cases as quickly as possible, but asylum cases are often complex and require full and thorough consideration.
"We have robust mechanisms in place to monitor standards of housing provided to asylum seekers.
"Following the awarding of Compass contracts, the Home Office and its providers carried out an inspection of accommodation standards and where necessary took action to ensure they met the necessary standards.
"Overall the performance of all three providers has shown steady improvement since January and G4S and Serco have made significant investment in their property portfolio. We will continue to monitor performance to ensure that standards are met."