The bbc understands sir keir starmer and foreign secretary yvette cooper lost confidence in sir olly robbins and was effectively sacked after a guardian investigation, external revealed mandelson had not been security cleared.
The pm is facing calls to resign amid claims he misled mps when he told them "full due process" had been followed.
Senior minister darren jones said sir keir had not been told of the vetting recommendation until tuesday this week, had not misled mps and would not be resigning.
Lord mandelson was announced as the uk's ambassador to the us in december 2024, before in-depth vetting had been carried out, and formally took up the role on 10 february 2025.
Just seven months later he was sacked over his ties to the late convicted sex offender jeffrey epstein.
On thursday, the government confirmed the foreign office went against the recommendation of the cabinet office's security vetting agency and allowed lord mandelson to take up the post.
By 11pm the same day, it was announced sir olly was leaving his post.
Kemi badenoch said the sir keir and ministers like darren jones were "taking the public for fools" as she questioned why foreign office officials would overrule security vetting procedures.
The tory leader told the bbc: "they must think that everybody is stupid. why would officials overrule an appointment of a politician?
"let's remember, peter mandelson was not a civil servant who they were covering up for, he was a labour party member who had been brought in from outside.
"why would officials say, 'well he's failed the security vetting, but let's not tell the prime minister', why would they do that? it just doesn't make any sense."
She added: "all roads lead to resignation - at some point there has been deliberate dishonesty."
Jones told bbc radio 4's today programme no minister was made aware of the recommendation by uk security vetting at the time, nor the foreign office's decision to overrule it.
At the time, he said, there was no obligation in the rules for ministers to be told about security vetting decisions.
Responding to the suggestion that it was not credible that sir olly would not have mentioned the decision to any minister, nor the prime minister, jones said: "i find this whole situation astonishing as well...
That's why i immediately suspended the right last night for the foreign office and other organisations to be able to use that exemption."
Asked directly whether sir keir had been lied to by the foreign office, jones said: "the foreign office did not tell the prime minister that they had granted developed vetting status to peter mandelson against the advice of the security and vetting process."
He said the pm had only been made aware of that on tuesday evening when documents became available as part of the process of selecting material relating to mandelson's appointment that is due to be released to mps.
Jones added "no minister is allowed to see these vetting documents as a matter of principle" because professionals were employed to conduct the "deeply invasive" checks.
Jones said the pm had been planning to make a statement to mps next monday once he had established the full facts but had been forced to take action after the guardian published its story.
Pressed on why sir keir did not raise the issue at pmqs on wednesday - the day after he learned about it - jones said this was because he had requested full details from antonia romeo, the head of the civil service, so he could be accurate when he faces mps on monday.