"That led to a force that was ill-equipped to go to war. The case in point that I'm referring to is when the Dutch were required to defend Srebrenica against the Serbs," Sheehan said.
"The battalion was under-strength, poorly led, and the Serbs came into town, handcuffed the soldiers to the telephone poles, marched the Muslims off, and executed them."
During the hearing, Carl Levin, chairman of the US Senate's Armed Services Committee, asked Sheehan: "Did the Dutch leaders tell you it was because there were gay soldiers there [at Srebrenica]?"
"Yes, they did. They included that as part of the problem," Sheehan said.
"That there were gay soldiers?" Levin then asked.
"That the combination was the liberalisation of the military, a net effect was basically social engineering," replied Sheehan.
Speaking to Al Jazeera, Jan-Willem de Bruin, from the Centre for Culture and Leisure in Amsterdam, the world's oldest gay, bisexual and transgender organisation, said he thought Sheehan's comments were "absolutely ridiculous".
De Bruin said: "I think it's a huge insult he made to everyone serving there [in Bosnia], and also it's a huge insult to all gay military over the world making peacekeeping operations.
"The Dutch forces already have no problem with gays in the military since 1974, so we have a long tradition in that."
The Dutch defence ministry issued a statement calling Sheehan's claims "absolute nonsense" and said that gay Dutch soldiers routinely co-operate with the US military in the Nato mission in Afghanistan.
Renee Jones-Bos, the Dutch ambassador to the US, said in a statement that he "couldn't disagree more" with Sheehan.
Jones-Bos said there was no evidence of the general's claims in the extensive record of research on Srebrenica.
ANP, a Dutch news agency, quoted Wim van den Burg, the head of the military union AFMP, as saying Sheehan's comments were "ridiculous" and "out of the realm of fiction".
The events in Srebrenica remain a sensitive subject in the Netherlands, where a six-year investigation into the massacre led to the government's fall in 2002.