The White House acknowledged Trump was urged by his predecessor, Obama, not to hire Flynn.
She told a congressional hearing Monday that Flynn not only lied about whether he and Russia's ambassador to Washington had discussed the lifting of sanctions, but then misled the vice-president about it, causing Mike Pence to unwittingly parrot the lie.
Trump suggested in a separate tweet on Monday problems with Flynn, fired in February, should have been flagged by the previous administration.
The delayed hearing came months after Yates informed the White House that Vice President Mike Pence's public statements about Flynn's communications with Russian Ambassador Sergey Kislyak were incorrect, warning that Flynn's actions rendered him susceptible to further manipulation by Russian intelligence.
The hearing came hours after Obama administration officials said former President Barack Obama also personally warned Trump against hiring Flynn during their November 10 90-minute closed-door meeting at the White House. The person was not authorized to discuss the testimony by name and requested anonymity.
She said she told Mr McGahn she had seen statements regarding Mr Flynn's contacts with the Russian envoy "that we knew not to be truth".
Instead, Trump chose to play up former director of national intelligence James Clapper's acknowledgement during the same hearing that he was not aware of any evidence of collusion between the president and Russian Federation, which American intelligence has concluded tried to sway the U.S. election in Trump's favor.
He added: "The Russia-Trump collusion story is a total hoax, when will this taxpayer funded charade end?"
Meanwhile, Yates also warned in her opening testimony that there were some issues she could not address publicly because they involved classified information.
"Director Clapper reiterated what everybody, including the fake media already knows - there is "no evidence" of collusion w/ Russian Federation and Trump", Trump said.
Get a sneak peak of the Armadillo UI on Google's Fuchsia OS
It's called Fuchsia OS and it's apparently meant for smartphones, but anything beyond that remains a mystery. It is way more flexible than Android and any number of apps can be placed anywhere on the screen.
Meanwhile, the Federal Bureau of Investigation has an active counterintelligence probe into the scandal, examining whether any Trump campaign official colluded with Moscow.
Less than a week into the Trump administration, Sally Yates, the acting attorney general, hurried to the White House with an urgent concern.
USA intelligence agencies have been blunt in their assessment that the hacks of Democratic email accounts were meant to benefit Republican Trump and harm Clinton.
Marshall Billingslea, a former Pentagon and North Atlantic Treaty Organisation official, wanted the information for Flynn, his boss.
Yates said McGahn was told "that we weren't the only ones that knew all of this, that the Russians also knew about what General Flynn had done".
Yates' warning about Flynn in January capped weeks of building concern among top Obama officials, former officials told the AP.
Multiple US intelligence agencies are evaluating Russia's attempts to influence the 2016 US election in favor of Trump.
In response to questions from two Texas Republicans at a Senate Judiciary subcommittee hearing, Yates painted a picture of a White House that kept the Department of Justice out of the loop ahead of the executive order's release.
The president has remained firm in his denial of any collusion with Russian Federation during the 2016 USA presidential campaign. Sheldon Whitehouse criticized Cruz for his comments alleging that Yates was motivated by partisanship. He pressed Yates on whether she was aware of any precedent for an attorney general to reject a decision by the Office of Legal Counsel, which had approved the executive order.
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