Bertie Ahern was also warned by Opposition leaders that there would be public outrage if disgraced former Fianna Fáil minister Ray Burke and others who obstructed the tribunal had their legal costs paid by the taxpayer.
The future of €21.5 million worth of applications for legal costs including €10.5 million from Mr Burke hangs in the balance following Justice Flood's resignation.
The Government said last night the decision on who is awarded costs is a matter for the tribunal.
The Taoiseach and the environment minister were alerted to the possibility that Justice Flood was about to resign as chairman at the end of May.
Yet, Mr Ahern did not notify the Dáil until June 24, after the Cabinet had discussed the issue. At that time he said that he had only been made aware of the legal issues arising just a few hours beforehand.
The Tánaiste was also kept in the dark, as she did not learn of Justice Flood's plans until days before that and was merely informed the weekend before the Cabinet meeting along with other ministers.
But yesterday, the Taoiseach revealed that the Attorney General met with Justice Flood; Judge Alan Mahon, and Judge Mary Faherty on May 26 to discuss Judge Mahon deciding on costs and Justice Flood becoming an ordinary member of the tribunal and that letters had been exchanged between the Government and Justice Flood.
Labour leader Pat Rabbitte said it was bizarre that the Taoiseach decided to inform the Dáil of the situation in such an incomplete manner.
"He certainly has been economical with the picture. It was wrong of the Taoiseach to handle it in this fashion," he said. Fine Gael leader Enda Kenny said the Taoiseach had more questions to answer about Justice Flood's resignation, and Mr Ahern had given the impression he only learned of the chairman's wishes last week.
"Given that the Attorney General knew that the issue of who decides on costs was problematic, why did the Taoiseach not have definitive legal advice on this issue when he spoke in the Dáil on June 24," he said.
But last night the Taoiseach's spokesperson absolutely rejected any suggestion that Mr Ahern misled the Dáil last Tuesday.
"The Taoiseach was clearly referring to legal implications outlined by the Attorney General in relation to Flood earlier that day at the Cabinet meeting," the spokesperson said.
According to the Tánaiste's spokesman, Mary Harney will not be making an issue of not being told about Justice Flood's plans.
"I think it's not unusual. She was notified in plenty of time," the spokesman said.