The Pakistani-born American was arrested shortly before the Dubai-bound Emirates flight was due to take off from New York.
"In his case, the airline seemingly didn't check the name, and the suspect was allowed to purchase a ticket and obtain a boarding pass," said an unidentified administration official.
Authorities had placed Shahzad on a "no-fly" list earlier that same day, but the plane he was on had already taxied away from a gate at John F Kennedy airport and had to be ordered to turn around.
Janet Napolitano, the US homeland security secretary, said customs officials recognised Shahzad's name on a passenger manifest and stopped the flight.
Chris Yates, a specialist in aviation security, told Al Jazeera that allowing Shahzad onto the flight was a security failure.
"There are supposedly systems in place that airlines can check to ensure that people boarding planes are not wanted for crimes.
"So this guy should not have been allowed ... to board the airplane. There are checks and balances in place but they didn't work."
Authorities say Shahzad is co-operating with investigators, but they do not yet know whether others were involved in the plan to blow up the vehicle in the crowded square.
Investigators said a gun was also discovered in the car Shahzad left at the airport.
Police Commissioner Raymond Kelly told a senate hearing on Wednesday that Shahzad purchased the gun in Connecticut in March.
Shahzad, 30, a former financial analyst, is accused of driving the vehicle rigged with a crude homemade bomb into Times Square late on Saturday and trying to detonate it.
He has admitted to his role in the plot and to receiving bomb-making training in Pakistan, according to court papers, and was charged on Tuesday with terrorism and attempting to use a weapon of mass destruction in Saturday's botched attack.
|Airport screening procedures were tightened following Shahzad's arrest [EPA]
On Wednesday, he reportedly waived his right to an early court appearance.
Investigators said shortly after becoming a US citizen a year ago, Shahzad gave up his job, stopped paying his mortgage and told a real estate agent to let the bank take the house because he was returning to Pakistan.
However US officials said on Wednesday they have been unable to verify statements that Shahzad trained at a Pakistani terror camp, as stated in the complaint against him, and have not linked him to any known group.
In court papers, investigators said Shahzad returned to the US on February 3, moved into an apartment in a low-rent section of Bridgeport, then set about acquiring materials and the sport utility vehicle he bought with cash in late April.
In Pakistan on Tuesday, intelligence officials said several people had been detained in connection with the case.
Al Jazeera's Kamal Hyder, reporting from Pakistan, said Shahzad's father-in-law was one of the five suspects arrested in the cities of Karachi and Faisalabad.
His parents' house was located in Peshawar but apparently the parents left once they heard about their son's arrest, our correspondent said.