The Government faced a growing outcry tonight after announcing that legislation is to be introduced as soon as possible to cap redundancy payments to civil servants.
Cabinet Office minister Francis Maude said the decision to legislate had been taken "with reluctance", but it had become necessary because of the economic climate.
He also blamed legal action against the previous Labour government by the Public and Commercial Services union (PCS), which won a High Court ruling that changes to the Civil Service Compensation Scheme were unlawful.
A Bill will be introduced to limit the cost of future payments by capping all compulsory redundancy pay-offs at 12 months' pay and limiting amounts for voluntary severance to 15 months' salary.
Unions attacked the move as "unlawful and undeserved" and raised the threat of legal and industrial action which could herald a summer of discontent.
PCS leader Mark Serwotka said: "If this so-called fair and progressive coalition Government get away with this, it would lay waste to communities across the UK where people rely on the services that our members and other public servants provide.
"We have always said we are prepared to negotiate a new scheme that protects existing civil servants' rights. We are also ready to talk about the alternative to cuts, including the billions of pounds in uncollected tax and public sector investment to drive the economy.
"But if ministers are determined to make low-paid public servants pay for a crisis caused by bankers and traders, we will use all the means at our disposal to fight back."
Prospect, which represents more than 120,000 civil servants, said the plans are "unlawful and undeserved" and pledged to fight them in the courts and the House of Commons.
"Around 600,000 staff are affected, of whom tens of thousands potentially face redundancy through no fault of their own," said deputy general secretary Dai Hudd.
"The Government wants to rip up their rights in a way that would do justice to King John, but it will not work. These rights are protected by law and bully boy tactics will not get round that fact."
Unite expressed "fury" that its 15,000 members at the Ministry of Defence, who the union said had been working flat-out to support the armed forces in Afghanistan, now face huge cuts in their redundancy pay.
Mr Maude told a civil service conference in London that the British system of a permanent civil service is one of the "jewels in our constitution", adding: "The service is admired throughout the world for the way in which it serves the elected government of the day.
"The work done by civil servants in the aftermath of the General Election and the transition to the new coalition Government exemplifies this excellence. It is a pleasure on returning to government in my case after 18 years to discover that these virtues and values remain intact.
"However, in the current fiscal and economic climate, there are vast new challenges for the civil service. It must play a central part in deficit reduction, providing better value for money for the taxpayer and better delivery."
Mr Maude said that by the year 2020, the civil service must be more efficient and effective, smaller, and able to deliver better public services at best value for money.
"To play its part in deficit reduction, the civil service must reform its terms and conditions for pay, pensions and compensation in the event of redundancy in a way which is modern, flexible and appropriate to the times.
"Most importantly, we must create for the civil service an affordable reward package with a sustainable balance between pay and pension and see through the reforms of the compensation scheme.
"The existing scheme is simply untenable. Under the current scheme a long-standing employee may be entitled to compensation which is hugely out of kilter with the statutory redundancy scheme and comparable arrangements in the wider public and private sectors."
A PCS spokesman said: "With one breath, Francis Maude claims to be proud of the valuable work civil servants do, and with the next he says he wants to cut their pay, pensions and jobs.
"This has nothing to do with modernisation or reform, it is about realising an ideological ambition of the old Tory right to turn the clock back on the welfare state - except this time it is being ushered through with the support of the Lib Dems."
The Government said accrued pension rights would not be affected by the new legislation, adding that it wants to negotiate with the unions.
The Cabinet Office said the move is aimed at bringing civil service payments in line with the best practice in the private sector.
Shadow cabinet office minister Tessa Jowell said: "Civil service compensation needs reform, but that needs to be done in a way that strikes a fair balance between protecting those faced with job losses and making a contribution towards tackling the deficit."