Some 12,000 jobs are to be lost at the Department for Work and Pensions (DWP) over the next three years.
Spending restrictions have been blamed for the move, which a union said would mean the loss of 200 offices, including job centres, in England and Wales.
The announcement came just hours after the government outlined "radical" changes to the benefits system.
It wants private firms and voluntary groups to be offered cash incentives to get the jobless into work for longer.
Work Secretary James Purnell said these plans, which will see more payments if someone is employed for six months, were intended to "personalise" services.
But the Tories called the idea it "tinkering" and accused Mr Purnell of trying to "steal Conservative language" on welfare.
'Yet another blow'
Referring to the job losses at the DWP, a spokesman said the department "has already reduced its staffing by 30,000 over the past three years without any significant compulsory redundancies".
"We are confident that, in the great majority of cases, the further reductions announced today will not mean anyone leaving the department who wants to stay," he added.
Savings of 5% must be delivered in each of the next three years to reduce DWP expenditure by more than £1.2 billion.
But Mark Serwotka, the general secretary of the Public and Commercial Services Union, said the proposed job cuts were "purely about crude cost-cutting" and would "do nothing to improve service delivery to some of the most disadvantaged in society".
The announcement was "yet another blow to a workforce who have battled to provide a service in the face of swingeing cuts and below-inflation pay increases", he added.
Freud review
It came after Mr Purnell announced a "commissioning strategy" at a conference in London, which will see more private companies and voluntary groups involved in finding work for people on benefits.
This acts on recommendations from an earlier review by investment banker David Freud.
New contractors are expected to be offered incentives for getting people into work for at least six months, with further incentives planned in the future for increasing it to 18 months.
In return, they will get larger contracts which last up to seven years - the current average is three years.
Mr Purnell said the new system would be a more personalised one, designed around each individual's needs and would be aimed at people who have been unemployed or on incapacity benefit for a long time.
"Instead of following the diktat of Whitehall, providers will focus on the needs of the person in front of them," he said.
"Instead of receiving grants for service they will be paid by results and instead of telling providers how to do their jobs we will hold them accountable for what they do."
Some 40% of claimants of the jobseekers allowance who find a job are out of work again within six months, according to a report by the Commons public accounts committee.
But shadow work and pensions secretary Chris Grayling said the government was trying to "steal Conservative language on welfare reform".
'Waste of talent'
"We've set out very clear and very detailed plans for welfare reform based on the experience in other countries, a very full package," he said.
"Gordon Brown is tinkering around the edges - a bit of reform here, a bit of participation by the private sector, a slight toughening of sanctions. Nothing like the scale of radical change we would need." And Labour's former welfare minister Frank Field welcomed some of the package but told the BBC the potential to expand the role of job centres, which he said had more local knowledge and expertise, had been overlooked.
"One of the reforms I wanted was actually for each of these local offices, if they wished to be, to opt as cooperative companies that would have their own budgets," he said.
For the Liberal Democrats, Danny Alexander expressed concerned the government was giving a licence to "bring in big multinationals from overseas".
He said: "I would like to see many of those local voluntary and private organisations who are making a real success of getting people back into work given much more scope to expand, to work locally, rather than being potentially pushed aside by big foreign providers."
This was the latest of a series of government announcements on welfare reform. Others have included making all long-term unemployed people do at least four weeks' work and making single parents look for work once their youngest child is seven by October 2010.
The Conservatives' proposals include assessing all incapacity benefit claimants to see whether they are really unfit for work and making the long-term unemployed do community work.
The Lib Dems say they would try to halve the number of incapacity benefit claimants by 2020 by introducing a single "working age benefit", with extra help for those with mental health problems and a simplified benefits system.
