EU migrants are to be barred from claiming out-of-work benefits, such as Jobseeker's Allowance, for their first three months in the UK, David Cameron has announced.
Those who do go on to claim the benefits will now only be able to get payments for a maximum of six months. Migrants caught sleeping rough could be deported and would not be allowed to return to the UK for 12 months.
The Prime Minister announced the shake-up amid fears of an influx of Romanians and Bulgarians, who will be entitled to come to the UK for work and can then claim benefits like other EU citizens from January 1.
But his intervention sparked stinging criticism from the European employment commissioner Laszlo Andor, who warned that Britain risked becoming the "nasty country" of the EU.
Earlier this week the European Commission claimed that immigration of Bulgarians and Romanians would boost the UK economy.
The Government's own figures for 2011/12 show that only 7% of those claiming Job Seekers Allowance, Employment and Support Allowance, Incapacity Benefit or Income Support were foreigners and only 31% of those were from within the EU.
However, unveiling his plans in the Financial Times, Mr Cameron said he "shared concerns" of many of his MPs over the ending of restrictions on Romanian and Bulgarian workers.
He said: "We are changing the rules so that no one can come to this country and expect to get out-of-work benefits immediately; we will not pay them for the first three months.
"If after three months an EU national needs benefits - we will no longer pay these indefinitely.
"They will only be able to claim for a maximum of six months unless they can prove they have a genuine prospect of employment.
"We are also toughening up the test which migrants who want to claim benefits must undergo.
"This will include a new minimum earnings threshold. If they don't pass the test, we'll cut off access to benefits such as income support. Newly arrived EU jobseekers will not be able to claim housing benefit."
Nick Clegg has welcomed the 'sensible and reasonable' tougher rules Other measures include fines of up to £20,000 for firms that pay below the minimum wage - an attempt to prevent undercutting of British workers.
Dozens of Conservative MPs want the Government to ignore EU law and extend existing controls on when new arrivals can claim the same benefits at UK citizens until 2018.
Currently, some immigrants can access Jobseeker's Allowance (JSA) within a month of arrival in the UK, according to Downing Street aides.
However, a report by University College London earlier this month found that immigrants had contributed £25bn to the UK economy between 2000 and 2011 - significantly more than they had claimed in handouts.
They were also 45% less likely to receive benefits than British people.
There are doubts over how quickly Mr Cameron could introduce the new rules, given the impending January 1 deadline.
His aides insisted that the six-month limit and the 12-month bar on returns could be brought in under existing legislation but the three-month delay on claiming benefits would need legislation, which is to be brought forward to early in the new year.
Deputy Prime Minister Nick Clegg said the Liberal Democrats were behind the tougher rules and called them "sensible and reasonable reforms".
"The right to work does not automatically mean the right to claim," Mr Clegg said.
Nigel Farage, the leader of the UK Independence Party, said: "These measures fall way short of what the British public want though. Our borders will remain open. Migrants will still be entitled to out-of-work benefits after just three months. It isn't nearly good enough.
Mr Andor told the BBC Radio 4 Today programme: "The unilateral action, unilateral rhetoric, especially if it is happening at this time, is not really helpful because it risks presenting the UK as the kind of nasty country in the European Union.
"We don't want that. We have to look into the situation collectively and if there are real problems react proportionately."
Shadow home secretary Yvette Cooper said the Prime Minister was "playing catch-up" after failing to take action earlier.
"Why has it taken him eight months to copy Labour's proposal to make the Habitual Residence Test stronger and clearer?" she said.
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