The Foreign Office is underfunded and further cuts could damage its ability to successfully operate for Britain overseas, a committee of MPs said.
The Foreign Affairs Committee has carried out its annual review into the work of the Foreign and Commonwealth Office (FCO) and while praising the "impressive" work done within tight financial constraints, it said reduced budgets "will have a detrimental impact".
It warned the diplomats should not become an "international English language school" as a result of changes to the British Council. The report said this "risks a diminution of the UK's influence and soft power".
Launching the annual report, chairman Richard Ottaway said: "The FCO does a good job in challenging circumstances but the budget cuts demanded by the Spending Review 2010 (SR2010) will exacerbate long-term problems caused by continued cost-cutting in the FCO.
"I am therefore disappointed in the lack of information provided to Parliament as to how the FCO is to meet its spending reductions target.
"Last year, my committee produced a report into the outcome of the SR2010 for the FCO. We concluded that SR2010 may turn out to have had a very damaging effect on the Department's ability to promote and safeguard UK interests overseas.
"The decisions so far taken by the FCO to implement the SR2010, including reductions in the deployment of UK-based staff overseas and the planned programme of property sales, have indicated that our initial conclusions were correct."
Cuts of £40 million are still being identified, which the MPs said was "disappointing".
And the committee urged the Treasury to loosen rules on property sales to ensure the FCO could deliver taxpayers best value for any sales, concluding the FCO's target of £60 million of annual asset sales was "extremely optimistic".
Additionally, the committee recommended the FCO rule out selling any "historic or prestigious" buildings in a bid to hit the targets and fund capital investments.
After hearing evidence on the changes to the BBC World Service - which is set to be transferred from the FCO in 2014 - the committee welcomed the appointment of Lord Williams as International Trustee for the service.
But the report said: "We maintain our earlier belief that a formal concordat governing the World Service's budget and output should be drawn up setting out the World Service's independence from budgetary pressures elsewhere in the BBC.
"The Government should monitor the role and performance of the International Trustee after 2014 when funding responsibility for the BBC World Service will be formally transferred from the FCO."