A tougher-than-expected squeeze on the unemployed is to be announced today as the jobless face the threat of losing all benefits for as long as three years if they refuse community work or the offer of a job, or fail to apply for a job if advised to do so.

In the most severe welfare sanctions ever imposed by a British government, unemployed people will lose benefits for three months if they fail to take up one of the options for the first time, six months if they refuse an offer twice, and three years if they refuse an offer three times.

Downing Street sources said the new "claimant contract" will come into force as soon as legislation is passed, and may not wait for the introduction of a streamlined universal credit system in 2013-14.

Iain Duncan Smith, the work and pensions secretary, will tell MPs that he is introducing the biggest shakeup of the welfare system since the Beveridge reforms ushered in the welfare state after the second world war. He will say that a new universal credit system will make 2.5 million of the poorest people better off and reduce the number of workless households by 300,000.

The welfare white paper is deemed so groundbreaking that David Cameron chose to laud the measures as he landed at the G20 summit in South Korea.

He said: "The message is clear. If you can work then a life on benefits will no longer be an option. If people are asked to do community work they will be expected to turn up. If people are asked to apply for a job by an adviser they will be expected to put themselves forward. If people can work and they are offered work, they will be expected to take it. This is the deal. Break the deal and they will lose their unemployment benefit. Break it three times and they will lose it for three years."

The regime will apply to all 1.6 million jobseeker's allowance claimants, irrespective of how long they have been unemployed. JSA is worth only £64.45 a week for over-25s, and No 10 said it expected the sanction to be enforced, once warranted, as a matter of course.

Job advisers should not use discretion to let people stay on benefit, Downing Street said, arguing that too many advisers do not make use of the sanctions available to them.

The new workfare regime is certain to be criticised for expecting the jobless to take work at a time when unemployment is forecast to rise. The move could potentially leave thousands of people receiving no benefits other than some money to cover their housing costs.

Many charities and local government leaders will be wary of offering work to unemployed people, especially if they have been in effect forced to take the work or lose benefit. The community jobs set aside for the jobless include clearing up litter and doing charity work.

Cameron argues that the new regime is necessary to prevent a dependency culture. He believes a new universal credit system bringing together tax credits and a range of benefits simplifies the system so much that it will ensure work will always pay in comparison with staying unemployed. Ministers say that, with 5 million people on out-of-work benefits and almost 2 million people growing up in workless households, they have to embark on "root and branch reform".

The new universal credit, costed at £2bn for this parliament, is designed to remove the financial disincentives to work, ensuring that someone keeps a minimum 35p in every extra pound earned. Cameron said: "It simply has to pay to work. You cannot have a situation where if someone gets out of bed and goes and does a hard day's work they end up worse off. That is not fair and sends entirely the wrong message."

Duncan Smith will cast his reforms as a "once-in-a-generation" attempt to get the jobless back to work. But the man credited by Duncan Smith as his greatest influence on poverty reduction criticised the changes . Bob Holman, an academic and community worker from Glasgow who has worked for Duncan Smith's thinktank, the Centre for Social Justice, accused the work and pensions secretary of forcing people into "degrading" jobs.

Asked his opinion about Duncan Smith and his plans for welfare reform, Holman said: "Well, my view has taken a bit of a dent. When Iain came to Easterhouse in 2002, one of the things he expressed admiration for were unemployed people who were working or giving their time as volunteers to our project … now he seems to have turned that on its head.

"He seems to be regarding them with disrespect and saying you're not really a part of society. We're going to force you to do these, what are really degrading jobs, which won't equip them for anything, but in a way are punishing them for not working and in a climate in which jobs are hard to get."