MPs have criticised continuing government incompetence over government data handling practices after it was revealed a missing Ministry of Defence (MoD) hard drive could contain information on as many as 1.7 million individuals.

Armed Forces minister Bob Ainsworth made the admission in a written statement to the Commons, adding that the disk was unlikely to have been encrypted. His estimate is far higher than those originally given for the loss. Officials had placed the potential tally at a modest 100,000 records.

The drive containing data from the MoD's TAFMIS recruitment system disappeared from EDS's premises at Hook and its loss was discovered as a result of the Cabinet Office crackdown on data handling and the MoD's own action plan designed to "continue to root out and expose areas where shortcomings need to be tackled".

Ainsworth told MPs: "The Information Commissioner's Office recognises that we may uncover further issues as we implement our assurance regime. This is a direct result of emplacing an effective approach to data security."

He said work to comply with Cabinet Office requirements will not be completed until October next year.

The missing information ranges from contact details for potential recruits to service personnel's next of kin, passport and national insurance numbers, drivers' licences, bank details and NHS numbers. Banks have been informed so relevant accounts can be flagged for scrutiny against unauthorised access.

Liberal Democrat defence spokesman Nick Harvey said the loss was "an absolute scandal" and warned the data was "a goldmine for organised crime and could even compromise national security" if troops became targets for extremists.

Tory defence spokesman Liam Fox said it was "another symptom of serial incompetence" and demanded someone should be held accountable.

And former Tory shadow home secretary David Davis said the missing information would make ID theft easy, adding: "This level of incompetence is frankly incredible and destroys completely any argument that the government can be trusted with information in burgeoning databases, let alone the ID card database."

A month ago the MoD admitted the loss of three portable disc drives containing files on 50,000 current and former service people. In the last four years, 658 laptops have been lost or stolen from the MoD, along with 26 portable memory sticks.