Dr Daly was scathing in his dismissal of the case made on behalf of British soldiers that there were many missing civilian casualties, including possible "terrorists", on Bloody Sunday who had been secretly buried later.
Asked if this was credible, he replied: "I think it is offensive nonsense."
Mr Michael Topolski, for the family of the late Mr Patrick Doherty, pointed out that a document produced by counsel for the soldiers asserted there were 34 "unidentified or untraced or unknown casualties" who might have included individuals engaged in "terrorist activity".
The plain inference, counsel suggested, was there may have been secret and private burials of people killed by the British army on Bloody Sunday. Dr Daly said he was not aware of any such burials.
Mr Michael Mansfield QC, for the families of Mr William Nash and Mr Barney McGuigan, then read out part of a statement given to the inquiry by a soldier, identified only by the tag Inquiry Number 1766.
The soldier said he was ordered two days after Bloody Sunday to go to "Craigavon cemetery" with a section of men to dig up fresh graves found there. "We found about seven or eight unmarked fresh graves, all containing the bodies of men, all of whom had apparently been killed by gunshot wounds," the statement said.
"This find was never recorded by the army. I do not know what happened to the bodies . . . none of them were in coffins. We were close to the end of our tour and we really did not care what happened next."
Dr Daly said: "A part of our culture is to have a grave to go to and to give respect to those who are dead. I think it is unthinkable."
Mr Edwin Glasgow QC, for a large number of soldiers, said his clients did not include the soldier who had made this statement. "Perhaps I also ought to make plain to you, it might come as some comfort to you and the decent people of this city, I have no instructions to associate myself with anything in that statement," he said.
The inquiry agreed to limit circulation of photographs of one of the soldiers alleged to have "finished off" a wounded man that day. The three judges allowed a compromise to an application from Sir Allan Green QC, for the paratrooper known as H, who cited fears that wider distribution of the pictures might help terrorists track him down.
He was identified by eyewitness Joseph Mahon - shot and wounded on Bloody Sunday - from pictures taken within six months of the military operation in Derry's Bogside in 1972. He was said by the witness to have walked up to Jim Wray, (22), as he lay wounded in Glenfada Park North close to Mr Mahon and fired two more shots into his back.
Sir Allan's application would have limited display of the photographs to inside the inquiry chamber.