The Home Secretary Jacqui Smith said she wanted to end the situation where foreign nationals "languish in limbo" by living here but not adapting to the British way of life.
Even the ultra-wealthy - who can currently avoid some of the conditions imposed on less well-off immigrants - will be expected to apply for British nationality or permanent residence.
"I would want to see a larger proportion of those that are here moving to full British citizenship," said Ms Smith.
"You will not be able to languish in limbo. Once your period of temporary residence comes to an end you will need to apply for the next stage or leave."
Winning citizenship will take at least six years from the point someone arrives in the UK, a year longer than at present because of a new stage of "probationary citizenship".
The probation period will last 12 months if the foreigner takes part in community activities such as volunteering, charity fund-raising, running a sports team or playgroup, or working as a school governor.
Migrants who do not take part in community work will have to wait longer - the existing five years plus a minimum of three years' probation.
This type of community work may even be made compulsory, said a Green Paper published today.
The rules will not apply to Europeans - including those from the eastern European countries which recently joined the EU.
But Ms Smith also announced a new review of access to welfare payments, such as child benefit, by people from other European Economic Area countries.
Immigration minister Liam Byrne said current take-up rates for British citizenship were low among certain foreigners - such as Filipinos (50 per cent), Australians (49 per cent) and Americans (40 per cent).
"There are some residents from some parts of the world who are languishing in limbo for some considerable period of time," he said.
Ms Smith went on: "I don't think it is a good thing to have people who are permanently living here but have not taken that step towards permanent citizenship."
Full access to benefits - such as jobseeker's allowance and income support - will no longer be granted after a person has been in the UK for five years.
Applicants will instead have to wait until they have completed their probationary period.
New conditions will be introduced on winning British citizenship, such as an emphasis on being law-abiding.
Migrants who have served a prison sentence would be barred from citizenship and could be removed from the country, the Green Paper said.
If human rights laws prevented someone with a criminal record from being removed from Britain, they would have to serve five years' probationary citizenship, it added.
Minor offenders could have to serve three years' probationary citizenship, and extra time could also be imposed on applicants who had been convicted of violent, drug or sex offences.
Parents whose children commit crime could be barred from citizenship or permanent residence in the UK, the document suggested.
"If people won't play by the rules in this country their journey to citizenship should be halted or slowed down," said Ms Smith.
A new fund financed by a surcharge on immigration applications will be set up to give cash to areas of the country which experience problems due to immigration - such as over-subscribed schools.
The fund is expected to raise tens of millions of pounds a year.
Higher levies will be imposed on groups such as children and elderly people who use more public services.
Ms Smith said there were new moves to review how European nationals in Britain are able to claim some benefits in the UK.
"We will be setting up a cross-departmental unit to look at access to benefits for European Economic Area nationals," she said.
Asked if it would examine hand-outs such as child benefit - which is currently paid to 69,000 children whose eastern European parents joined the EU in 2004 - Ms Smith said: "Yes, it's those type of issues.
"We know there are very many of our European partners who want to see a benefits system that works in a larger Europe and in the context which we now have."
A draft Bill based on today's proposals is due this summer with full legislation expected in November.
Changes will apply to new arrivals after the new laws are passed, and not to foreigners already living in the UK, so reforms are only likely to affect migrants arriving from 2010.
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