The level of UK benefits paid in pensions, jobseeker's allowance and incapacity benefit is "manifestly inadequate" because it falls below 40% of the median income of European states, according to the Council of Europe in Strasbourg.

The finding in an annual review (pdf) of the UK's adherence to the council's European social charter is likely to provoke a fresh dispute between the government and European legal structures. Iain Duncan Smith, the work and pensions secretary, dismissed it as "lunacy".

The Council of Europe, which has 47 member states, said the conclusions were legally binding in the same way that judgments relating to the European convention on human rights had to be applied by member states.

However, the DWP suggested the findings merely had to be "taken into account" by British courts when assessing claims. The difference of interpretation is likely to lead to lengthy disputes when ministers attend the next round of meetings in Strasbourg.

In the report's most critical section, the council's European committee of social rights said: "Even if the minimum levels of short-term and long-term incapacity benefits, state pension and jobseeker's allowance satisfy the requirements of the European code of social security, they are manifestly inadequate in the meaning of article 12§1 of the charter as they fall below 40% of the Eurostat median equivalised income".

It added: "The committee notes … that short-term incapacity benefit stood at £71 (€85) and long-term incapacity benefit at £94 (€112) per week. ESA and jobseeker's allowance stood at £67 per week (around €321 per month). As regards the state pension, it stood at £102 (€490 per month)."

Britain was one of 38 countries criticised by the committee on Wednesday, all of whom were found to have violated the regulations in some manner. Other countries were deemed to have made more breaches.

Duncan Smith said: "This government has made great strides in fixing the welfare system so that spending is brought under control. It's lunacy for the Council of Europe to suggest welfare payments need to increase when we paid out £204bn in benefits and pensions last year alone.

"Whether for short-term needs or longer-term support, millions of people find that the welfare system provides a valuable and fair safety net when they need it most. And thanks to the triple lock, pensioners are now benefiting from a state pension that represents the highest share of earnings in over 20 years. This is meaningful support helping people every single day."