Plans to impose an annual limit on benefit payments could be ambushed in the House of Lords following a warning from within Whitehall that the move risked making 40,000 families homeless.
A leaked letter from the private office of the Communities Secretary, Eric Pickles, raised the alarm over the unforeseen effects of proposals to cap total household benefits at £500 a week, or £26,000 a year.
The scheme was announced by Chancellor George Osborne at last year's Conservative Party conference. But to the embarrassment of Mr Pickles, a candidly worded letter about the scheme from his private secretary, Nico Heslop, to his opposite number at Downing Street was leaked yesterday to The Observer.
It warned that the estimated £270m annual savings from the plan could be wiped out by the cost to councils of rehousing families who can no longer afford to pay for their accommodation. Far from contributing towards the Government's deficit-reduction programme, the scheme could end up generating a "net cost" to the Exchequer.
It also said that welfare cuts would jeopardise at least half of the 56,000 affordable homes to rent which the Government hopes will be built by 2015, as contractors doubt whether they can recoup their costs from tenants.
Mr Pickles's spokesman stressed that the minister did not share the views in his private secretary's letter – and fully supported the moves to trim the benefit bill.
But last night Labour and Liberal Democrat opponents of the measure were circling in the House of Lords, which is considering the proposals in detail. They said they would use the leaked letter to argue their case and claimed their doubts about the scheme were shared by senior Conservatives. One Liberal Democrat peer said: "There will be a serious attempt to amend the Bill. The letter will reinforce out arguments."
Labour said the private letter vindicated its argument that the benefit cap could cost more than it saves and would increase homelessness.
Liam Byrne, the shadow Work and Pensions Secretary, said: "We were assured by ministers that costs wouldn't rise. Now top-level leaks reveal the truth. Iain Duncan Smith has promised the House of Commons he will not U-turn on the benefits cap. Perhaps now David Cameron will order him to think again."
A spokesman for Mr Pickles said: "We are fully supportive of all the Government's policies on benefits. Clearly action is needed to tackle the housing benefit bill which has spiralled to £21 billion a year under Labour."