The Department for Work and Pensions has dismissed a report that ministers have agreed to cut £2.5bn from benefits paid to those who are too sick to work.

Labour has seized a story in the Observer newspaper to claim the coalition government is targeting the most vulnerable people in the country.

But a government spokeswoman said the figure, revealed in a leaked letter in the paper, was "totally out of date".

She said negotiations on the Employment and Support Allowance were continuing.

The Observer claims that in a leaked letter - written by Chancellor George Osborne to Work and Pensions Secretary Iain Duncan Smith on 19 June - Mr Osborne said an agreement had been reached to impose cuts on the budget for Employment and Support Allowance (ESA) - the successor to incapacity benefit.

'No figure agreed'
Mr Osborne writes: "Given the pressure on overall public spending in the coming period, we will need to continue developing further options to reform the benefits as part of the spending review process in order to deliver further savings, greater simplicity and stronger work incentives.

"Reform to the Employment Support Allowance is a particular priority and I am pleased that you, the prime minister, and I have agreed to press ahead with reforms to the ESA as part of the spending review that deliver net savings of at least £2.5bn by 2014/15."

In the paper, Yvette Cooper, shadow work and pensions secretary, said the letter showed "the Tories and Liberal Democrats have clearly agreed to hit most heavily those they think will find it difficult to fight back".

Jim Knight, shadow employment minister, said the coalition was "conspiring to take thousands of pounds from the most vulnerable in our communities".

"This exposes George Osborne's rhetoric about living on benefits as a 'lifestyle choice', as being a smokescreen to hide vicious cuts on the poorest.