Benefit fraud has been cut in the last few years
The government needs to do more to prosecute suspected benefit fraudsters, MPs have said.
The Commons public accounts committee said fewer than 7,500 out of 200,000 potential fraud cases investigated in 2006/7 had ended up going to court.
It said the Department of Work and Pensions risked not being "seen to be taking firm action".
The DWP said benefit fraud had been cut by almost two-thirds since 2001 and it was determined to catch fraudsters.
The committee welcomed progress in cutting benefit fraud from £2bn in 2001/2 to £800m in 2006/7.
But it noted that £700m of this reduction had been due to a decision to reclassify overpayments of disability living allowance as non-fraudulent.
The MPs also called it "unacceptable" that benefit overpayments due to error had almost doubled from £1bn to £1.9bn over the same period.
About 200,000 cases of potential fraud were investigated in 2006/7 where the DWP considered there was a high possibility of prosecution - but only 7,483 of them were taken to court, according to the report.
Some 90% of the cases prosecuted had resulted in convictions, it added.
The report said: "Potential fraudsters will not be deterred if the department is not seen to be taking firm action where there is good evidence that fraud has taken place."
It urged the DWP to continue to take a "firm and co-ordinated approach" on organised crime posing a "serious threat" to the benefit system.
The committee's chairman, Conservative MP Edward Leigh, said: "Benefit fraud diverts public funds into the pockets of criminals and, in so doing, reduces our confidence in the benefits system.
"There are important areas where the DWP must improve its performance."
Liberal Democrat work and pensions spokeswoman Jenny Willott said: "The benefits system is fundamentally flawed. Mistakes by officials are costing taxpayers millions while the government twiddles its thumbs.
"The benefits system has grown so complex that even officials can't understand it."
But anti-fraud minister James Plaskitt said: "We have reduced fraud across the benefit system by almost two-thirds since 2000/1.
"Benefit fraud is a crime and we are determined to catch those taking money that does not belong to them."
He added: "We recognise more needs to be done to tackle error. We launched a new counter-error drive last year which will save £1bn of error over the next five years."