The UK Border Agency was thrown into fresh crisis on Thursday after the computer system suffered a serious failure, resulting in massive disruption to visa applications for the next two weeks.
The agency's IT system has crashed under the volume of applications, meaning the number of appointments the agency can process will be vastly reduced.
Hundreds of people queuing outside the Croydon offices for biometric visas have been told to go home because the system cannot cope, the BBC reported.
A UKBA spokeswoman said: "We are experiencing some IT problems in our Croydon Public Enquiry Office which we are working to resolve as soon as possible.
"In order to complete cases that have been affected, we will be reducing the number of daily appointments until May 18.
"We will prioritise completing all outstanding applications and those with cancelled appointments can rebook through the UK Border Agency website or can submit postal applications using our postal service."
Keith Vaz, chairman of the Commons Home Affairs Select Committee, said: "This is yet another example of UKBA's failure to plan properly for a new scheme.
"In the past over £750 million has been wasted over e-borders and £9.1 million on unreliable iris scanners.
"UKBA must ensure they have the technology in place to cope with new policy before it is introduced."
He added: "I will be raising this shambles with (UKBA chief executive) Rob Whiteman when he comes before the committee on 15 May 15."
Shadow home secretary Yvette Cooper said: "What on earth are the Home Secretary and her ministers doing?
"The UK Border Agency and Border Force are lurching from shambles to shambles. Yet ministers don't seem to have a clue what's going on. Instead of getting a grip, the Government just keeps making it worse."
A UKBA spokesman added: "We did have a IT outage today but our system is now back up and running. There will be a small backlog of appointments to clear. Anyone who needs a urgent appointment will get one."
The setback is the latest in a string of disasters for the Home Office.
Earlier on Thursday, it was revealed that the UK Border Force had failed to meet its targets at Heathrow for the processing of passengers, with many visitors from outside the EU forced to wait more than 45 minutes.
In April, MPs rounded on the beleaguered agency, which was heavily criticised for the length of queues blighting the UK’s main airport.
The latest setback will put further pressure on Home Secretary Theresa May, who is already facing questions over the on-going deportation of terror suspect of Abu Qatada to Jordan.
Andrew Tingley, an immigration lawyer at Kingsley Napley, said it was "beyond farcical" that new rules requiring foreign nationals from outside the EU to have a biometric residents permit had left the IT system unable to cope.
"The system that was introduced was not fit for purpose," he was quoted by the Press Association.
"It was close to collapse a few weeks ago. It has now collapsed. It's an absolute mess."
The row comes after Labour accused the Home Office of drifting "from one shambles to another" as it battles with concerns over queues of up to three hours at Heathrow airport in the run-up to this summer's Olympic Games.
Tingley also claimed the delays at the border were being made worse by the time taken for the system to validate travellers' fingerprints and warned of the impact on the UK's economy.
"You have senior global managers and directors of companies saying, 'enough is enough'," he said.
"Employers are saying they can't access a reasonable immigration system and they're considering moving abroad.
"They've come to the point now where they're seriously considering not investing or working in the UK because they can't access any reasonably competent system."
He said most senior executives, investors, entrepreneurs and leaders of industry need their application for a biometric residents' permit to be decided on a same-day basis.
UKBA's solution of asking people to apply by post, which can take up to six months, "is not an answer", Mr Tingley said.
"For people who need to travel, they can't have their passport taken away for six months. They can't afford to be without their passport for that long."
He went on: "The issue the UKBA have at the moment is the IT system is not suitably robust for the volume of application they're dealing with."
UKBA staff were "literally at the end of their tethers", he added.
"One said they were not even offering a minimum service. The system cannot cope."
Tingley said the online system used to book appointments often crashed and helpline staff were unable to talk to the applicant about their case unless it had already been outstanding for more than six months.
Investors and entrepreneurs had even been turned away from the offices, he said.
He added that a family of four on a highly-skilled migrants visa was paying more than £6,000, but the system was still not working.
Since the rollout of the permits began on 25 November2008, they have been issued to almost 600,000 migrants, an average during the first three years of the scheme of more than 16,000 per month, an impact assessment dated last November showed.
It added that the roll-out of the permits over 10 years was expected to cost £139 million.