The Liberal Democrats have called for a fundamental reform of the so-called "bedroom tax" in a dramatic withdrawal of support for one of the coalition's highest-profile welfare reforms.
Chief Secretary to the Treasury Danny Alexander told the party's Conservative coalition partners that it was "clearly time to take stock and change our approach" on the highly-criticised policy.
But the U-turn was given short shrift by a Tory source who insisted that the party remained "committed" to the change and said it was "imperative" the Government stuck to its push to slash the benefits bill.
Labour, which plans to challenge Lib Dem ministers to back its commitment to scrap the policy in a fresh Commons vote, accused Nick Clegg of "unbelievable hypocrisy".
Writing in the Daily Mirror, Mr Alexander said no-one should face a cut in state help if there was no suitable smaller property available and all disabled claimants should be exempt.
The shift came a day after the publication of an internal government review that showed almost 60% of households affected by the housing benefit changes were in arrears as a result and a shortage of smaller properties meant just 4.5% of tenants had been able to downsize to avoid it.
Nick Clegg has been under pressure to join Labour in opposing the policy since the Liberal Democrat conference voted overwhelmingly to commit the party to the review of what activists called a "reprehensible and evil" move.
Party president Tim Farron - who was among MPs who voted in favour of a previous Opposition motion calling for it to be abandoned -.said in April that the reform had "caused huge social problems and distorts the market".
"We as a party cannot support this," he said.
Mr Alexander said the reform was made "with the best of intentions" but needed to be fundamentally changed.
"Overwhelmingly, our benefit reforms are working, resulting in many more people gaining the independence and self respect of re-entering work," Mr Alexander wrote in the newspaper.
"However with only one in 20 of affected claimants having successfully downsized, it's clearly time to take stock and change our approach in this particular area."
"Our revised proposal is that new tenants in the social rented sector would receive housing benefit based on the number of rooms they need. But those already in the social rented sector would only see a reduction in benefit if they are offered a suitable smaller home and, crucially, turn it down.
"Disabled adults should be treated the same as disabled children, by permanently exempting them. And we would introduce new measures on social landlords to manage their stock more effectively so more people get put into the right home."
In a direct message to the Tories, he added: "The Liberal Democrats will make the case for these new fairer rules, seeking to get them in place during this Parliament.
"If we can't convince our Conservative coalition partners, we will commit to these reforms in our 2015 manifesto."
In a swift retort, the Tory source said: "Bringing the bloated Housing Benefit bill under control is a key part of our long-term plan to fix welfare.
"Our reforms are working - and it's imperative we stick to them. The Conservatives are committed to this."
But Lib Dem Care Minister Norman Lamb said the evidence was "clear" that the policy was not working.
"Should you not be willing to review your position in the light of evidence and experience? It seems to me that the evidence is clear," he told BBC2's Newsnight.
Shadow work and pensions secretary Rachel Reeves said: "This is unbelievable hypocrisy from Nick Clegg.
"The Lib Dems voted for the bedroom tax. There wouldn't be a bedroom tax if it wasn't for the Lib Dems. And in February when Labour tabled a bill to scrap the bedroom tax, the Lib Dems were nowhere to be seen.
"It is clear the only way to cancel the bedroom tax is to elect a Labour government next year."
The study, published by the Department for Work and Pensions on the day of the reshuffle, found that there was widespread concern that those affected were "making cuts to household essentials" or incurring credit card or payday loan debts to make up the shortfall.
The report found 522,905 households were affected by the policy in August 2013, which equates to 11.1% of social tenancies.
Around 57% of claimants were cutting back on household essentials and 35% on non-essentials in order to pay their shortfall while a quarter (26%) said they had borrowed money - 21% from family and friends, 3% on a credit card and 3% via payday loans.
Some 10% had used savings and 9% been given money by their family.
Only 4.5% of claimants downsized to avoid being hit by the measure within the social housing sector within six months of the removal of the spare room subsidy (RSRS) policy coming into force in April last year.
A Tory source said the Lib Dems have "never demanded the restoration of the spare room subsidy in private".
Lib Dem Justice Minister Simon Hughes denied that the party had "changed our mind" about the policy.
"Our party was clear that what we in the end negotiated in Government was not an ideal solution," he told BBC Radio 4's Today programme.
"Personally I argued that the change that we are now agreed should be made on the evidence, which is that you can't impose a policy saying you are going to be penalised for having a spare room when you can't move to a smaller place, was practical."
Mr Clegg told LBC radio: "Unlike Labour, we are not sticking our heads in the sand. Of course you need to do something about housing benefit reform, of course you have to do something about overcrowding. Unlike the Conservatives, we want to do it as fairly as possible.
"The real trigger was that we published a report, commissioned by the Government itself, which simply showed it wasn't working in the way that was intended.
"I'm a practical man. I think that when something isn't working in the way that you planned for it to work, you fix it."
Speaking on his Call Clegg phone-in, he denied it represented a sudden U-turn: "This is something my party has been saying for a long time. We first as a party said that this is the approach we want to take publicly last year, it's something that a cross-party committee in the House of Commons... said that this is the change we should make.
"We then wanted to wait for the evidence. I'm an old-fashioned person when it comes to policy, I think you should be led by the evidence. The evidence this week was quite clear that it's not working as was intended."
Mr Clegg said it was "complete baloney" for the Conservatives to claim that they were surprised by the Lib Dem announcement: "I've been constantly badgering away within Government with the DWP to try to make sure we really stress-test this properly.
"We have constantly said that we want to look at how this policy is working in practice."
He added: "I want to fix this. The Conservatives apparently don't - they just want to carry on making the same mistakes. Labour don't even want to deal with the problem."
Mr Clegg said the plan set out by Mr Alexander would be fairer and more effective and would "over time encourage more people to downsize where they can".
A Department for Work and Pensions spokesman said: "We spend around £24 billion a year on housing benefit so we have a safety net in place.
"However, it was simply wrong that the taxpayer was paying for social housing tenants to have spare bedrooms when around 300,000 people were living in overcrowded homes and around 1.7 million were on social housing waiting lists in England alone when the policy came into force.
"Especially because this rule already applies to housing benefit claimants in the private sector - introduced by the previous government.
"We have made £345 million available to councils to help vulnerable people with the changes - including disabled people".