Nick Clegg has said he was only aware of "indirect and non-specific concerns" relating to the sexual misconduct allegations against Lord Rennard.
Despite the issue being raised in 2008, he insists he only knew the full extent of the claims last week.
The former Lib Dem chairman has been accused of sexual impropriety by two women in a report that was aired on Channel 4 news on Thursday.
Rennard has strenuously denied the accusations.
Clegg had been under pressure to admit whether or not he was aware of the claims after the The Mail On Sunday reported one of the women who had made allegations wrote on Facebook back in 2009: "I just don't know how nick can know and not do anything.. :-( makes me very sad."
In a statement made on Sunday evening, Clegg said: "The allegations made on Channel 4 concerning Lord Rennard last Thursday were extremely serious and distressing to the women involved. It is critical they are investigated thoroughly and dealt with properly and they will be.
"But I would like to make one thing crystal clear. I did not know about these allegations until Channel 4 informed the party of them shortly before they were broadcast. I have today spoken to one of the women in the broadcast who I respect and admire and who confirmed that she had never raised the issue with me.
"I am angry and outraged at the suggestion that I would not have acted if these allegations had been put to me. Indeed, when indirect and non-specific concerns about Chris Rennard’s conduct reached my office in 2008, we acted to deal with them."
When these concerns were put to Rennard by Clegg's then chief of staff, Danny Alexander, he "categorically denied" them.
The deputy PM then went on t explain why no further action was taken.
He said: "As my office only received concerns indirectly and anonymously, as those involved understandably wanted to maintain their privacy, there was a limit to how we could take this matter forward following Chris Rennard’s resignation.
"It is incorrect to state that there was any other separate inquiry by my office or anybody in it."
The Liberal Democrat's handling of the situation has been heavily criticised.
In response Clegg said: "In particular the suggestion that a complaint was made but was not dealt with as a formal complaint.
"I am therefore determined that we carry out a thorough investigation into our procedures and how we applied them at the time to ensure we have a full and clear picture of what happened and the lessons that we need to learn.
"This review will be independently chaired."
"But in the meantime, I will not stand by and allow my party to be subject to a show trial of innuendo, half-truths and slurs.
"The important thing is that we respect the women who have come forward and do everything to get to the truth. That is what will now happen.
On sunday morning, business secretary Vince Cable denied that he or Clegg knew anything about the situation.
Speaking on the BBC's Andrew Marr show, Cable said: "The whole purpose of setting up a proper inquiry is to establish exactly who said what to whom, and whether these allegations were properly pursued at the time."
When asked if he was aware of complaints against the peer before the Channel 4 News report he replied: "Absolutely not."
He added: "Nick Clegg has also said he was not aware of these allegations until they appeared on TV last week. But they are serious, and we take them very seriously.
"It is obviously wrong if there are women there who have made complaints and felt they haven't been dealt with properly."
Lord Rennard - a key party strategist and adviser to a succession of Lib Dem leaders before standing down due to ill health in 2009 - has said he is "deeply shocked" by the allegations, which he "strongly disputes" and regards as a "total distortion" of his character.
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