The former acting attorney general Sally Yates has spoken publicly for the first time about her concerns over Mr Flynn's conduct in the early days of the Trump administration.
Her testimony to a hearing of a Senate sub-committee investigating Russian interference in the 2016 election was the most detailed account yet of events that led to Mr Flynn leaving the White House in February.
The Trump administration, including vice president Mike Pence, had repeatedly insisted that the former US Army general had not discussed American sanctions in conversations with the Russian ambassador to the US.
But Ms Yates went to the White House to warn officials that they had been misled about the nature of those calls between Mr Flynn and Sergey Kislyak, which took place before Mr Trump was inaugurated.
It took 18 days before he was relieved of his duties, after the story was revealed by the Washington Post.
Ms Yates told the hearing: "We felt like it was critical that we get this information to the White House, in part because the vice president was making false statements to the public and because we believed that General Flynn was possibly compromised.
"This was a problem because not only did we believe that the Russians knew this but that they likely had proof of this information.
"And that created a compromise situation where the national security adviser could be blackmailed by the Russians."
The conversation took place two days after the FBI interviewed Mr Flynn about those contacts. He is also facing questions about business connections to Russia and Turkey.
Ms Yates was fired by Mr Trump after refusing to enforce the president's controversial travel ban on people from a number of majority Muslim countries.
The hearing took place hours after former Obama administration officials revealed that the outgoing president had warned Mr Trump against hiring Mr Flynn during an Oval Office meeting after the 2016 election.
The hearing brought the issue of the Trump campaign's alleged ties to Russian officials back into the public eye.
The president himself had earlier tweeted that it was Obama administration which had given Mr Flynn "the highest security clearance" when he worked at the Pentagon. Mr Flynn had been fired by the Obama administration in 2014.
Mr Trump has dismissed FBI and congressional investigations into his campaign and Russia as a "hoax". He says he has no ties to Russia, but the investigations are expected to last into next year.
The former director of national intelligence, James Clapper, told the hearing that Russia had interfered in the 2016 election.
"They must be congratulating themselves because this exceeded their wildest expectations," he said.
He said the lessons of 2016 should be a "clarion call" for vigilance and action in future elections.
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