The social security advisory committee has recommended that ministers should not proceed with proposed changes. If they do, a new set of safeguards should be included, the committee has said.
Its report, delivered to ministers about a month ago but yet to be published, represents a blow for Mr Lilley, who outlined the proposals in a controversial speech at the last year's party conference.
The committee of independent professionals and academics feels the plans are ill-advised and would prove too punitive. It is particularly concerned about the impact of the proposed changes on some of the thousands of Irish nationals who come into Britain each year.
Irish nationals enjoy greater rights in Britain than citizens of other foreign countries: they are allowed to vote in UK elections providing they are resident in the country.
If ministers decide to proceed with the plans, they will also be obliged to publish the committee's critical report alongside the proposals, and explain why they are overriding the committee's recommendations. At present, people looking for work can claim up to six months' income support without having to prove further commitment to the UK.
Under the Lilley plans, a new residence test would be applied to all new claimants of income support, housing benefit and council tax benefit. It would apply to all those who have moved to Britain within the last five years. The test would include: whether claimants have family living in Britain; whether they have had stable employment in the country; the frequency and length of trips back to their home country; ownership of property in the home country; and their employment record abroad.
The Social Security Secretary's multilingual attack on unemployed Europeans claiming British benefits was cheered by Conservative party activists at Blackpool when he told the conference: 'It made my blood boil this summer to read of foreign drug addicts feeding their habit by milking our benefits and continental students getting pounds 300 a week rent paid while British couples languish on the waiting list.'
The speech was prompted by reports last summer that thousands of continental Europeans, including drug addicts, were exploiting Britain's social security regime. Labour has attacked the proposals, arguing that the Government should instead concentrate on cutting waste and inefficiency.