Child benefit, a universal weekly payment, will be frozen for three years from April 2011. The announcement, which amounts to a significant real terms cut in its value, was a surprise announcement in the budget.
Osborne had been predicted to include child benefit but commentators had envisaged the introduction of means testing or taxation to target families who needed it most, and angry campaigners say his move hits the poor hardest.
Bob Reitemeier, the chief executive of the Children's Society, described it as a "big blow for very vulnerable families".
But Osborne insisted the freeze – projected to save almost £3bn by 2015 – would fund significant increases in child tax credits targeted at those on low incomes, and the budget would have no negative impact on child poverty in the next two years.
It had been a tough decision to freeze the benefit, he said, but he believed it was the fairest solution. He added that taxing child benefit, which is usually claimed by mothers, would have meant a working mother would get less than the non-working partner of a millionaire, while means testing would create a "massively complex" new system to assess household incomes.
"I know many working people feel that their child benefit is the one thing they get without asking from the state," Osborne told MPs. "This is a tough decision, but I believe it strikes the right balance between keeping intact this popular universal benefit while ensuring that everyone across the income scale makes a contribution to helping our country reduce its debts."
Child benefit is worth £20.30 a week for a family's first child, and £13.40 for each younger child.
Save the Children said extra help given to low-income families through an increase to the child element of child tax credit of £150 above indexation next year, at a cost of £2bn, was a welcome move. But a spokeswoman added: "We fear this benefit will be wiped out by Osborne's other tough measures."