Ms Conway said Mr Obama brought in a six-month ban on Iraqis after the arrest of "the masterminds behind the Bowling Green massacre".
"Most people don't know that because it didn't get covered," she added.
In fact, there was no massacre at Bowling Green, Kentucky.
Ms Conway, whose official role is counsellor to the president, later tweeted that she meant to say "Bowling Green terrorists".
She made her remarks during an interview with MSNBC television, in which she defended Donald Trump's ban on immigrants from seven Muslim-majority countries.
"President Obama had a six-month ban on the Iraqi refugee programme after two Iraqis came here to this country were radicalised, and they were the masterminds behind the Bowling Green massacre," she said.
In 2011, Barack Obama's administration brought in enhanced security measures for Iraqis after two men were arrested on terror charges - but there was never a formal ban in place.
It came after Iraqi natives Waad Ramadan Alwan and Mohanad Shareef Hammadi were arrested on charges of attempting to send weapons and money to Iraq to support al-Qaeda there. They also admitted using homemade bombs against US troops when they lived in Iraq.
The pair lived in Bowling Green, Kentucky - but were never accused of planning or attempting to carry out an attack in the US. Both are still in prison.
"Bowling Green Massacre" began to trend on Twitter following the interview, as users ridiculed Ms Conway's error in tributes to the fictional people who lost their lives in a massacre which did not happen.
She also recently made headlines for coining the term "alternative facts" when defending President Trump's White House.
In his first briefing, incoming White House press secretary Sean Spicer gave attendance figures on Mr Trump's inauguration which contradicted photographic evidence - and were quickly denounced in many US news outlets as "falsehoods" and "lies". Ms Conway later said Mr Spicer had been presenting "alternative facts".
The phrase quickly became the subject of ridicule online.
A top aide to US President Donald Trump, Kellyanne Conway, has cited a "massacre" which never happened while defending the president's controversial immigration ban.