Families on the brink of destitution face a "postcode lottery" for emergency help because of failures in transferring responsibility to local councils and a spending squeeze on town halls, MPs said.
The Commons work and pensions committee called for better co-ordination from Whitehall to make those hit by welfare changes such as the so-called "bedroom tax" were not left without a long-established state "safety net".
Analysis by the National Audit Office found councils in England spent only half the cash they were given in 2013/14 when the job of providing discretionary contingency payments - for items such as food, heating, clothing and other essentials - was transferred from central government,
The Department for Work and Pensions provided funding worth £4.82 per working age adult but only £2.40 was spent.
And a quarter expected to use less than their full allocation in 2014/15, it found, amid uncertainty over future funding at a time of mounting pressure on local authority budgets and "limited" support from Whitehall in setting up schemes.
The NAO said payments faced an "uncertain" future with some councils providing a good service while others had scaled back or halted help altogether but warned that neither DWP officials nor many council chiefs had more than a "limited understanding" of the human or financial impact.
Insufficient work had been done to establish whether need was going unmet despite charities reporting a rising demand for assistance, it added.
NAO head Amyas Morse, head of the National Audit Office, said: "Councils provide discretionary local welfare support, but increasing numbers are stopping doing so, and less is being spent overall now than in 2013.
"The consequences of creating this gap in provision are not understood, either in terms of impact on vulnerable people or of creating potentially costly additional care or medical needs in the longer term."
The committee - chaired by Labour former welfare minister Frank Field - said the "bewildering" new set-up had left vulnerable claimants "confused as to where to turn".
It said positive examples - such as Croydon in south London where officials contacted thousands of households at risk of the biggest losses from benefit cuts to ensure they received advice on how to manage the change - should be copied across England.
But it warned that in other places restrictions such as residency tests could prevent those fleeing domestic violence from getting help and said local councils should be told always to consider cash payments where appropriate.
Consideration should also be given to providing a Scotland-style "breathing space" for those being pursued for debts, amid evidence of sharp increases in the use of bailiffs by some councils and the imposition of extra charges to increase revenue.
There should also be a statutory ban on taking disability payments into account when calculating payments to prevent disabled people and their carers from being adversely affected by the benefit cap or removal of the spare room subsidy, known by critics as the "bedroom tax".
Mr Field said: "As the old saying goes, a stitch in time saves nine: emergencies that are not dealt with early will escalate.
"Some councils are doing great work and realising the potential of localised emergency welfare - tackling the underlying causes of their residents' needs, where possible promoting self-sufficiency and ultimately saving public money.
"But localisation of welfare is the most radical departure in welfare since the (Clement) Attlee government laid down a minimum income throughout the entire country for what would otherwise be the destitute poor.
"Inevitably some local authorities are not yet achieving a national minimum. Local and central government must take joint responsibly for closing the gaps in the safety net and minimising both the human and financial costs.
"Welfare reforms such as the Benefit Cap and the Bedroom Tax, and an expansion of discretion in deciding who receives welfare, mean that the principle of a state-guaranteed minimum income to prevent hardship and destitution, which has been the cornerstone of our system certainly since the time of the Attlee government, is under threat."
The leader of Labour-run Croydon Council, Tony Newman, said that Government austerity measures meant even those authorities considered to be coping well were unable to do more than "mitigate" the hardship.
"We welcome the recognition of the fantastic work we have done around here.
"But even boroughs like ours are going to struggle with this if we are going to continue to see cuts to welfare and ongoing cuts to local government."
A DWP spokesman said the Government's welfare reforms were designed to restore "fairness" to the system and that they were working closely with local authorities, charities and landlords to ensure people received the support they needed.
"It is right that we have given local councils more control because they understand best their local area's needs," the spokesman said.