Pilots of a Flybe Bombardier Q400 allowed the aircraft to drift below its glidepath after becoming distracted by an electrical failure that had affected the captain's displays.
It descended to about 700ft (210m) above terrain, while still 8nm (15km) from the runway, before the ground-proximity warning system ordered the crew to pull up.
The Q400 had been conducting an instrument landing system approach to Exeter's Runway 26 on 11 September 2010. Its autopilot was engaged and the aircraft had been descending to a selected altitude of 2,600ft.
At about 3,300ft the engine display indicated a processor failure. While the first officer's primary displays remained normal, the captain's showed absent speed bugs and minimum descent altitude setting.
The captain tried various techniques to restore the display, including switching the air-data computer source before reverting to the original when this failed to have an effect. However, the UK Air Accidents Investigation Branch says that this reversion, by design, cancelled all previously-selected flight-director modes - including the altitude selection. This deactivation "went unnoticed" by the crew, it adds, and the effect was to allow the Q400 to descend through its cleared level.
"While attempting to resolve an unfamiliar failure which had resulted in unexpected cockpit effects, both pilots became distracted from the primary roles of flying and monitoring the aircraft," it says.
Having failed to capture the cleared altitude the aircraft continued to descend until the ground-proximity warning system issued a terrain alert - prompting the two pilots to look up - followed a few seconds later by a "pull up" command.
There had been no action to correct the flightpath before the warning, suggesting the pilots were "not aware of the extent of the deviation" and were not monitoring the Q400's track or its flight-mode annunciator, says the AAIB.
It adds that the crew did not follow standard procedures after the terrain warning.
The AAIB points out it has investigated two previous incidents involving Flybe Q400s, in which the aircraft descended below their cleared level during approach owing to inappropriate mode selection and inadequate annunciator monitoring.
Flybe, which gave the pilots additional training before returning them to duty, has since introduced a new flight-operations monitoring programme involving observers in the cockpit.