Westminster City Council has spent over £3m in six months paying for people waiting for permanent housing to be put up in hotels, figures show.
The authority has the most families in long-term bed and breakfasts in London and has had to resort to more expensive hotels to cope.
From October to March, Westminster paid £3,573,321 to hotel booking agency Polyglobe.
The council said the housing benefit cap means it has little choice.
Councils have a legal duty to re-house homeless people.
Housing Minister Mark Prisk said: “It cannot make sense to pay more for housing a family in one room than it would cost to house them in suitable self-contained accommodation.”
But Westminster Council’s housing spokesman Councillor Jonathan Glanz said: “The changes to housing benefit caps in particular, and the changes to welfare reforms, have meant that we have seen a huge increase in the number of people that are presenting as homeless.
“Although we have been redoubling our efforts to ensure that we have more and better self-contained accommodation for people, inevitably the sheer numbers of people that have come along have meant that we haven’t been able to accommodate them all.”
The Conservative-run council claims the numbers living in hotels are falling and added it has done deals for 600 new properties for homeless people.
Figures from the public sector spending website Spotlight On Spend, showed £955,058 was spent in March alone.
In the first nine months of 2012, more than £2m was spent accommodating people in four-star hotels.
Jason Sallis has been living at a Jurys Inn hotel in Imperial Wharf, west London, where a room costs over £100 a night, for 14 months.
Before, he was living in a council flat opposite Holloway Prison, which he said cost £70 a week covered by housing benefit.
He said: “At first I felt quite privileged to be in a really nice hotel but over time you’re restricted to what you can and can’t do.
“On the surface it looks good but you’re looking at million pound houses around you and it makes you feel sick because I just want to be a normal person living in a normal home.
“You can’t cook your own meals. You can’t listen to music how you want to listen to it. You can’t smoke… You’ve got to eat takeaways all the time.”
A 53-year-old grandmother who has multiple sclerosis is also living in the hotel.
The woman, who wants to remain anonymous, was evicted from her home eight months ago because she went into arrears when her benefits were cut.
“After two World Wars and people going through rations and what’s happening now with money being spent freely it’s not right. It’s like taking normality from people’s lives.”
Housing Minister Mr Prisk said there was “no excuse” for families to be stuck in temporary accommodation and that it was a waste of public money.
He said £470m worth of funding had been invested to help tackle homelessness.”
He added: “Whilst it is ultimately a matter for councils to decide how to make best use of their budgets, it cannot make sense to pay more for housing a family in one room than it would cost to house them in suitable self-contained accommodation.”
Last December, BBC London learned more than a third of London councils have unlawfully housed homeless families in B&Bs for more than six weeks, with Westminster, Barking and Dagenham and Hammersmith and Fulham accounting for highest numbers.