David Cameron has admitted around 30,000 passport applications have been delayed - after the Government earlier denied a backlog.
The Prime Minister told the House of Commons there had been 300,000 more applications than normal at this time of year and that 10% of these had been delayed.
He said emergency plans were being put in place to ensure families who want to go on holiday get their passports in time.
In an angry exchange at Prime Minister's Questions in the House of Commons, Labour leader Ed Miliband said the Government needed to "get a grip" on the unfolding crisis.
He said the row between Theresa May and Education Secretary Michael Gove had distracted the Home Secretary from her job.
"The truth of the picture of this Government is we have the Home Secretary fighting with the Education Secretary but not paying attention to the business of government," he said.
"The truth is that is tens of thousands of people are finding that their holidays are being cancelled because they are not actually getting a passport."
However, Mr Cameron said the Home Office had been on top of the situation since the beginning of the year.
Earlier on Wednesday the Government denied there had been a pile-up of applications after unions claimed a 12-year high in applications and cuts in staffing had lead to a 500,000 backlog.
Mr Cameron and Mrs May said 250 staff had been redeployed to tackle the problem, working seven days a week around the clock to make sure people got their documents.
Meanwhile, Sky has seen a letter sent to the UK Visas and Immigration Department saying 72 of their staff will start training next week on how to process passport applications with a view to being redeployed.
The increase in passport applications started in January and coincides with the closures of regional application offices across the world in an attempt to cut costs.
British citizens living abroad now have to apply in the UK and many of those are now reporting significant delays.
The increase has also been blamed on the number of people feeling they can now afford holidays with the economic recovery.
Pictures taken by a disillusioned worker in the Liverpool passport office show tens of thousands of applications waiting to be dealt with.
One MP said thousands of families face having their summer holiday plans ruined because documents were not being prepared in anything like the normal time.
Some families who want to make sure their documents are returned in time face paying extra for a faster service - up to £55.50 on top of the £72.50 standard fee.
Three million passports have already been issued this year, with officials processing an average of 18,000 applications a day over the last two months.
Mike Jones, from the PCS Union said: "There are half a million applications that are waiting within the Passport Office at the moment.
"That figure is raised steeply over a number of months. The Home Office and the Passport Office used to have strategies in place for when the figure reached 150,000. They would put contingency plans in to deal with those amounts."
He told Radio 4's Today programme: "Now we have seen the figures are up to 500,000 and rising at the moment. Even all the contingencies that they are trying to put in place, we are still seeing that figure rising, so there is clearly a crisis going on within the Home Office and the Passport Office as well."
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