The US military has been forced to admit the 8,000 Iraqi soldiers they claimed to have captured last week are now battling British forces.
Iraq's 51st Infantry Division, which has about 200 tanks, is now engaged in the southern city of Basra.
The Pentagon is claiming the confusion is the work of the Fedayeen Saddam - Saddam Hussein's most trusted paramilitary unit.
The US is accusing it of organising the tactic of posing as civilians and faking surrenders.
Defence Department officials reported on Friday that they had won the surrender of the entire 51st Division, a regular Iraqi army unit deployed in southern Iraq to defend Basra, the nation's second largest city.
On Saturday, officials backtracked, saying they had only taken a couple of commanders and the rest of the men had "melted away" - a term used for those who laid down their arms and returned home.
On Monday there were reports that one of the "commanders" turned out to be a junior official who misrepresented his rank in hopes of getting better treatment.
Then on Tuesday, British forces reported a tank battle with elements of the 51st outside of Basra. Asked about the confusion, the Pentagon said the division's equipment was taken over by the Fedayeen and possibly members of Saddam's Republican Guard, his best-trained troops.
"Some of their equipment may have been used by the Fedayeen perhaps, or other folks that Fedayeen brought with them," a Pentagon spokesman said.
"I mean, supposedly there were some, maybe perhaps a Republican Guard members who changed to civilian clothes and came south. But I have seen no reliable evidence yet - and it may be because we haven't seen it yet - that the 51st is reconstituted."
AP