Birmingham and Wolverhampton city councils have been attacked over their treatment of refugees after they became two of the first cities in Britain to withdraw from a legal agreement to provide council houses for asylum seekers.

The decision by the two local authorities threatens to throw Government policy on housing immigrants into chaos as other cities are now considering following suit.

The move has been heavily criticised by campaigners representing asylum seekers, who claim the two councils are allowing some of the most vulnerable people in society to suffer further.

Birmingham housing cabinet member John Lines insisted his decision to stop providing homes for about 200 asylum seekers a year from summer 2011 was not financially driven.

The UK Borders Agency reimburses the council’s costs, although Coun Lines said payments fall some way short of meeting the bill in full.

He said he was acting to protect thousands of “our people” in Birmingham who are becoming homeless each year.

It was no longer fair to reserve even a small number of council properties for asylum seekers, he argued.

In Wolverhampton, 124 homes had been provided for asylum seekers. Coun Les Pugh, cabinet member for adults, said the decision was in the interests of local people.

He said there were currently 13,405 people on the waiting list for council housing, of which 6,868 were in “housing need”.

Announcing the change in Birmingham, Coun Lines (Con Bartley Green) said: “Over the last year, we have seen a sharp increase in the number of homeless people in Birmingham and we must help the citizens of this city first and foremost. With a long waiting list for homes, we really need all our properties for our people in these difficult economic times.”

In an interview with the Daily Telegraph, however, Coun Lines was more outspoken when responding to a suggestion that the new policy could be interpreted as racist.

He said: “Hundreds of Brummies, hundreds of my people are in B&Bs instead of council-provided homes. Why should that be? My people have got to come first.

“The asylum seekers arrive here, they have a blooming family and they keep having children – it’s a burden on the system. If people say I’m racist then I’d say we’ve got Brummies of all colours here, third or fourth generation Asians and blacks, but if you say I’m putting Birmingham people first, then, yes, I am.”

He stressed that Birmingham would continue to help the Government find homes for asylum seekers through private sector providers. Coun Lines said Birmingham had taken in around 1,000 asylum seekers this year, mostly from Afghanistan, Zimbabwe and north Africa, while the agency only paid for 200 homes.

In total, there are thought to be around 6,500 people who are homeless in Birmingham, although numbers have increased sharply recently and are running at about 700 applications for emergency accommodation a month – by far the highest rate of any UK city.

In addition, there are about 30,000 people on the council house waiting list.

One in ten of the 723 homeless applications lodged in the city in July were from 16 and 17-year-olds, a rise of 256 per cent in only a year.

Labour housing spokesman John Cotton described Coun Lines’ move as a “smokescreen” designed to focus attention on to a relatively small number of asylum seekers.

Coun Cotton (Lab Quinton) added: “This is all very emotive, but his decision will have no impact on the real issue of tackling homelessness.”

Refugee Council chief executive Donna Covey said she was disappointed at the council’s decision.

Ms Covey added: “Many asylum seekers have fled persecution and conflict, and the least they deserve is to live in safety and dignity while the UK Border Agency makes a decision on their case.

“Contrary to what many believe, asylum seekers do not jump the queue for council housing and they cannot choose where they live. They are dispersed to often deprived areas of cities across the UK, and often live in ‘hard to let’ properties.

“We know these are hard times, but this is no reason to let some of the most vulnerable people in our society to suffer further.”