Lawsuits against British veterans who fought in Iraq and Afghanistan could "undermine" soldiers' decision-making on the battlefield, the head of the Army has said.
General Sir Nicholas Carter said he feared people "fabricating" claims against troops, which could hamper the military's ability to fight.
The Government has paid out in hundreds of cases and hundreds more Iraq War veterans have been told they are under investigation.
David Cameron earlier this month ordered action to bring a halt to "spurious" legal claims against veterans of the Iraq War.
Sir Nicholas, chief of the general staff, told the Daily Telegraph: "There is potential for less scrupulous individuals to try and find ways of fabricating potential cases against soldiers and that is very sad.
"It is something that would, over time, undermine our ability to take the sorts of risks that are necessary to be able to prevail on the battlefield.
"If our soldiers are forever worrying that they might be sued because the piece of equipment they are using is not the best piece of equipment in the world, then that is clearly a potential risk to the freedom of action which we need to encourage in order to be able to beat our opponent."
The Prime Minister has asked the National Security Council to draw up a plan to "stamp out" what he described as an "industry" trying to profit from service members through legal claims.
Measures could include curbing the use of ''no win, no fee'' arrangements and strengthening the authorities' investigative powers.
But seven human rights groups said the clampdown was "ill-judged and inappropriate" as many of the claims, although yet to be proven, were "extremely serious".
More than 1,500 allegations have been submitted to the Iraq Historic Allegations Team (Ihat), which has sent documents to around 280 veterans telling them they were involved in an incident under investigation.
A spokesman for law firm Leigh Day said the Government had paid compensation in more than 300 cases relating to the abuse and unlawful detention of Iraqis, including the death of Baha Mousa in 2003.