The closely watched Jobseeker's Allowance claimant count rose by an unexpected 2,300 last month to 1.47 million, marking the first increase since January, official figures today revealed.
Unemployment also fell by less than expected in the three months to July, down 8,000 to 2.47 million.
However, Britain saw the largest rise in employment since records began in the quarter as 286,000 more people secured jobs.
The figures from the Office for National Statistics (ONS) suggested the recordbreaking leap in employment came largely as those classed as economically inactive, such as students, took on jobs.
Employment minister Chris Grayling said: "Today's jump in employment, driven by the private sector, is good news but it doesn't disguise the fact that the system the Government inherited is failing to get people on welfare into these jobs.
"It is neither fair for the nearly five million people on benefits, nor the taxpayer who supports them.
"That's why we are pressing ahead with re-testing everyone claiming incapacity benefits and introducing our new Work Programme, which will give people the tailored support they need to move them into sustained work."
Mr Grayling said the biggest quarterly rise in employment on record, driven by the private sector, was welcome news but he added that the fact that these jobs were not being filled by people on benefits underlined the need for urgent reform.
He said that while the number of people in employment rose by 286,000 on the latest quarter, the nearly five million people claiming the three main out-of-work benefits had not improved significantly, with a slight increase this month in the numbers claiming Jobseeker's Allowance.
The quarterly rise in employment, which was the largest since the ONS began collecting the data in 1971, was driven by a rise in both part-time and full-time workers.
Those in part-time work increased by 166,000 quarter-on-quarter to 7.9 million in the three months to July, but the number of full-time workers soared by 121,000 to 21.2 million in an encouraging sign for the UK labour market.
Today's data also showed the unemployment rate easing to 7.8% in the quarter to July.
But the figures suggest the rise in employment may be primarily down to economically inactive people finding work, rather than unemployed people getting jobs.
In particular, the ONS said more students may be taking on part-time jobs alongside their studies.
The number of full-time students in employment rose by 47,000 in the three months to July, while those students classed as economically inactive fell by 62,000.
Fears over the impact on unemployment levels ahead of the Government's public sector spending cuts are unlikely to subside, with the data showing a mixed picture.
The rise in those seeking Jobseeker's Allowance will cause concern, with experts already warning the private sector may not be strong enough to compensate for the 600,000 public sector jobs expected to go over the next five years.
The number of long-term unemployed is another worry, with those out of work for more than 12 months up 16,000 to 797,000 in the three months to July, according to the ONS.
There was some modest good news on wages in the data, which showed a 1.5% rise in pay in the year to July, up from 1.3% previously.
Virgin Atlantic chief executive Steve Ridgway said: "There is no doubt the demand is building in both our business and leisure markets, leading to our current recruitment drive. This week we have inducted 170 new cabin crew and have launched our engineering apprenticeship scheme for school leavers."
Virgin Atlantic is also recruiting for 120 new roles in its new customer service centre in Swansea.