Mr Pickles said the authority must respond to the criticisms in a damning report by senior civil servant Sir Bob Kerslake - or he would take “much tougher action”.
And in a dig calculated to wound the pride of civic leaders, he said Birmingham “risks losing its status as our second city for good” because of the city council’s failings.
Mr Pickles was responding to Sir Bob’s report, which found that Birmingham had been overtaken by other places due to its poor economic performance and service delivery.
In a statement to Parliament, he:
* Confirmed that he would change change Birmingham’s electoral arrangements so that every councillor is elected at once, every four years. Elections are currently held three years in every four, with a third of councillors elected at any one time.
* Said he would consider setting up a new body to focus on creating jobs and increasing skills, starting in the most deprived parts of Birmingham, he said.
* Urged Birmingham and neighbouring councils to “put aside their differences and reach agreement on a combined authority quickly”.
* Announced plans to appoint an independent improvement panel “that will provide the support and robust challenge the city council needs”, to report formally on progress in December 2015.
Mr Pickles said in a statement: “Birmingham is a great city which has made a fantastic contribution to British history, but the council has been holding it back. This report makes clear that Birmingham risks losing its status as our second city for good if it does not start taking common sense steps to improve its performance now.
“For too long the council has been a dysfunctional organisation which has failed to get to grips with the problems its faces and the economic challenges of the future. It must stop looking to central government to bail it out and come up with innovative solutions itself.
“Now is not a time for the council to feel sorry for itself, but to start providing the leadership, skills and services its people need as the best authorities are doing across the country.
“I thank Sir Bob and his team for their work and look forward to seeing how Birmingham, its leaders and the improvement panel I am appointing respond to the challenge he has set them. But be in no doubt that if they do not, the next government may decide to take much tougher action.”
Council leader Sir Albert Bore said the review was ‘too prescriptive’ and smacks of political interference from Government.
He said: “We recognise and accept the broad thrust of recommendations in the report. We want what is best for Birmingham and will be making every effort to deliver positive change in the weeks, months and years ahead.
“But we are not entirely persuaded that the report as a whole is a true and full reflection of the state of the city council. That is because it is silent in large part about the good work already underway.”