Benefit rules which left the taxpayer footing the £1,600 a week rent for a former asylum seeker and her family to live in a luxury flat are to be changed.
As part of a shake-up, Work and Pensions Secretary Yvette Cooper also revealled that she will abandoned reforms that critics said would cost thousands of poor families £15 a week.
Controversy was fuelled last month when it emerged that a claimant of Housing Benefit was living with seven of her children and her mother in a £1.8 million London property.
Local authorities have demanded more control over how payments are calculated amid complaints that big variations in house prices in adjacent areas have seen allowances spiral.
Now the Government has set out measures that could be used to exclude the highest rents - so that people were not placed in accommodation that "other working households in the area could not afford".
The Government will consult on alternatives, such as giving Rent Officers back the right to exclude the top 5-10% of rents when calculating Benefit levels, setting rates based on smaller areas and capping and banding.
Yvette Cooper, who announced the proposed changes alongside measures to encourage jobless Housing Benefit claimants back to work, said benefit reform "also means tackling the problems caused by a small proportion of very high rents to make the system fairer too".
The latest changes will pay for a U-turn on previously proposed changes to Local Housing Allowance (LHA) after they were condemned in a consultation exercise.
Families currently receiving LHA are able to keep up to £15 a week if they choose to rent a home below the LHA's maximum for their area, but the Government had proposed removing the payment from April next year.