Disability organisations said the decision threatened thousands of jobs.
Mr Portillo announced the end of the Priority Suppliers Scheme, which gives priority for government contracts to companies employing disabled people, in a letter to companies last week.
Mr Portillo said the scheme was contrary to a European Commission directive on open competitive tendering.
But Commission officials said yesterday that they were surprised at the Government's interpretation of the rules, which had not been intended to restrict opportunities for the disabled.
And Labour accused Mr Portillo, who is away on holiday, of 'accepting European rules which threaten British jobs, without a fight'.
A spokesman for the Department of Employment said the directive had come into effect on 14 June - before Mr Portillo took the job. It means priority could no longer be given for contracts worth more than pounds 96,000.
Disability campaigners protested that the move was another assault on disabled people after Conservative MPs talked out a Bill to ban discrimination against the disabled.
The company that will suffer most from the loss of the scheme will be Remploy, which employs 8,736 disabled people in 95 workshops and factories and had total sales of pounds 127m last year.
Tony Withey, Remploy's chief executive, said: 'The Priority Suppliers Scheme was very valuable to us and other employers of disabled people. In addition, the textile group has been hit by recent manufacture of Ministry of Defence clothing in Africa and Eastern Europe.
'The combined effect of these two moves could be the loss of substantial MoD clothing contracts. The consequence would be a considerable reduction in the work available for Remploy's disabled employees.'
Steve Middleton, of Mencap, the charity for the mentally handicapped, said: 'I am very concerned because Remploy has been very supportive in finding employment for people with learning difficulties.
'This decision is bound to impact in some way and, if the company cannot provide the same level of support and back-up, we have got serious problems.'
Mike Barrett, of the National League of Blind and Disabled People, said the end of the Priority Suppliers Scheme was 'another nail in the coffin of supported workshops and factories'.
He said the Government was using the Commission directive as an excuse. In the 1980s trade unions had complained to the Commission that the scheme was unfair competition but the EC had allowed it to continue.
An Employment Department spokeswoman said Remploy would continue to receive an pounds 80m government subsidy to cover low productivity.Reuse content