The unemployed will be ordered to do periods of compulsory full-time work in the community or be stripped of their benefits under controversial American-style plans to slash the number of people without jobs.

The proposals, in a white paper on welfare reform to be unveiled this week, are part of a radical government agenda aimed at cutting the £190bn-a-year welfare bill and breaking what the coalition now calls the "habit of worklessness".

The measures will be announced to parliament by the work and pensions secretary, Iain Duncan Smith, as part of what he will describe as a new "contract" with the 1.4 million people on jobseekers' allowance. The government's side of the bargain will be the promise of a new "universal credit", to replace all existing benefits, that will ensure it always pays to work rather than stay on welfare.

In return, where advisers believe a jobseeker would benefit from experiencing the "habits and routines" of working life, an unemployed person will be told to take up "mandatory work activity" of at least 30 hours a week for a four-week period. If they refuse or fail to complete the programme their jobseeker's allowance payments, currently £51.85 a week for those under 25 and £65.45 for those over 25, could be stopped for at least three months.

The Department for Work and Pensions plans to contract private providers to organise the placements with charities, voluntary organisations and companies. An insider close to the discussions said: "We know there are still some jobseekers who need an extra push to get them into the mindset of being in the working environment and an opportunity to experience that environment.

"This is all about getting them back into a working routine which, in turn, makes them a much more appealing prospect for an employer looking to fill a vacancy, and more confident when they enter the workplace. The goal is to break into the habit of worklessness."

Sanctions – including removal of benefit – currently exist if people refuse to go on training courses or fail to turn up to job interviews, but they are rarely used.

The plans stop short of systems used in the US since the 1990s under which benefits can be "time limited", meaning all payments end after a defined period. But they draw heavily on American attempts to change public attitudes to welfare and to change the perception that welfare is an option for life.

Last night the shadow work and pensions secretary, Douglas Alexander, suggested government policy on job creation was reducing people's chances of finding work: "The Tories have just abolished the future jobs fund, which offered real work and real hope to young people. If you examine the spending review then changes such as cuts to working tax credit are actually removing incentives to get people into work. What they don't seem to get about their welfare agenda is that without work it won't work."

Anne Begg, Labour MP and chair of the Commons select committee for work and pensions, said that many unemployed people already had a work record and carrying out work experience would give them less time to search for a job. "The problem is finding a job," she added. "One of the reasons the last government moved away from work placements and towards things such as the Future Jobs Fund was that it actually acted as a hindrance to them looking for work."

The Observer has also learned that ministers have abolished the Social Exclusion Taskforce, which was based in the Cabinet Office and co-ordinated activity across departments to drive out marginalisation in society. Documents show that the unit has become a part of "Big Society, Policy and Analysis".

Jon Trickett, a shadow minister focusing on social exclusion, reacted angrily, saying that ministers should "hang their heads in shame". Whitehall sources insisted the work would carry on, but more of it would take place in the Department for Work and Pensions.

Naomi Eisenstadt, who was director of the taskforce until last year and is now an academic at Oxford University, said the shift was worrying. "I don't think it is significant in terms of the name – call it a banana – who cares? What does worry me is why they are not using the civil servants who were doing the work on deep disadvantage in the Cabinet Office and exploiting their expertise," she said.

Eisenstadt added that it would be a concern if the government believed the "big society" could take the place of government intervention. "If you speak to any minister I am sure they would agree that civil society is one part of the solution, but not the whole solution," she said.

The proposals come as the government prepares to unveil policy plans across a number of departments. Tomorrow, the Ministry of Justice will reveal that thousands of criminals with serious mental illnesses or drug addictions will no longer be sent to prison but will instead be offered "voluntary" treatment in hospital. Documents will show that offenders will be free to walk away from NHS units because officials believe it would be pointless to create duplicate prisons in the community. "While treatment is voluntary, offenders in these programmes will be expected to engage, be motivated to change and to comply with the tough requirements of their community order," they will say.

Kenneth Clarke, the justice secretary, said: "Serious criminals who pose a threat to the public will always be kept locked up, but in every prison there are also people who ought to be receiving treatment for mental illness rather than housed with other criminals. The public would be better protected if they could receive that treatment in a more suitable setting."

· This article was amended on Sunday 14 November 2010. We said that current payments were £50.95 a week for those under 25 and £64.30 for those over 25. This has been amended