Peter Wetherby QC, representing seven of the families of victims, said a central issue of what the security services knew about the bomber Salman Abedi and what they did will be held in “closed hearings”.
He said this will mean families’ lawyers and members of the press and public will not be allowed to attend.
Evidence involving information judged to be potentially of use to terrorists is subject to restriction orders and those hearings will be closed, as the evidence is deemed critical to national security.
But Mr Wetherby has questioned the need for "secrecy" regarding the relationship between Salman Abedi and known terrorist Abdalraouf Abdallah.
He stressed that much of what is known about the bomber and his background came via the media and not through official channels or the authorities.
He said the relationship between Abedi and Abdallah was an example of the “alarm” of the families at the prospect of closed hearings.
Abdallah, also from Manchester and jailed for terrorist offences in the UK, was twice visited in jail by Salman Abedi and the two discussed martyrdom attacks.
They were in contact before, during and after his Abdallah’s conviction and in the months leading up to the Arena attack.
Yet in official reports and in an MI5 statement from a witness X submitted to the inquiry, the security services had redacted Abdallah’s name and he is only referred to by a letter.
Mr Wetherby said: “It doesn’t seem to us that there was any legitimate privacy right as regards him, and no national security reason to redact his association with the Abedis. So, why the secrecy?
“The only people or organisations protected by Abdallah’s anonymity, his redaction from reports and the witness statement, are it seems, the security services.
“The failure to recognise the association between Salman Abedi and Abdalraouf Abdallah was a real missed opportunity.
“The redaction and omission of Abdallah’s name from reports and the witness statement is an indication of a lack of transparency by the security services and frankly it calls for a rethink by this inquiry.
“Without the media exposure would there have been an attempt to keep Abdallah’s name out of this process?”
He again cited press reports detailing the Abedi’s links to extremism, his “radicalised” family and association with terrorists.
Mr Wetherby added: “What exactly does one have to do to get the attention of the security services?”
Mr Wetherby said a public inquiry must “pull no punches” and be a “warts and all” investigation and the families accepted the need to keep some information of use to terrorists private.
He added: “However, they also recognise that a veil of secrecy is likely to do the opposite.
“Overbearing secrecy does not protect national security, it does the opposite.
“It protects failure and it prevents progress. It undermines confidence. Justice requires that light is shone into the darkest corners.”
He said confidence in the inquiry from families is “high” but if MI5 is seen to be treated differently during the inquiry then “confidence will inevitably wane” and findings based on hearings held behind closed doors “will be met with scepticism”.
Abedi was convicted of murder in March and later sentenced to life in prison with a minimum term of 55 years for his involvement in the attack.
The 22-year-old plotted with older brother Salman to detonate a homemade explosive packed with shrapnel in a crowded place, hoping to murder as many people as possible.
The extremist brothers bought huge amounts of chemicals online for their bomb, and met with a convicted ISIS terrorist as they plotted the atrocity.
Salman, 22, was the one who carried out the attack, blowing himself up in the foyer of the arena as concertgoers – including many young children – streamed for the exits and to meet their parents.
The inquiry was adjourned until Tuesday morning.
Additional reporting by PA Media.