The government is paying to keep 25,000 homes empty for non-existent asylum-seekers, enough to house the population of Taunton or Ashford, a confidential Downing Street memo reveals.

At a time when ministers are worried about shortages of accommodation for nurses, teachers and other essential workers, the memo reveals taxpayers' money is being wasted on empty homes earmarked for a wave of asylum-seekers which never materialised.

Tony Blair is so concerned at the scandal, which is costing more than £100m a year, that he challenged David Blunkett, the home secretary, to explain it at a recent Downing Street meeting on asylum. Confidential minutes from the meeting confirm the 25,000 empty houses and flats are being financed by the National Asylum Support Service (Nass), a Home Office body set up to provide asylum seekers with homes while they claim refugee status.

Demand, however, has been less than expected because the number of asylum seekers has halved in the past 18 months. But the Home Office is still obliged to pay for the properties as it failed to insert a get-out clause in the three-year and five-year contracts it made with councils and private landlords.

As a result the government must keep the homes until at least next June. Many have been empty since last year.

The waste is made worse by the lack of housing elsewhere. A Treasury-sponsored review in January suggested there is a shortage of 39,000 homes per year, of which 31,000 needed to be "affordable homes", mostly for rent and for key public service workers.

The disclosure will increase pressure on Blunkett whose deputy, Beverley Hughes, had to resign after misleading the public and parliament over another immigration fiasco disclosed by The Sunday Times.

This weekend David Davis, shadow home secretary, said he would be reporting the matter to the public accounts committee, the Commons public spending watchdog. "This is a classic example of bad planning by a department that has become the hallmark of mismanagement throughout Whitehall," he said.

Details of the blunder are contained in a confidential seven-page memo entitled "Prime minister's asylum stock take".

The Downing Street meeting, attended by Blair, Blunkett, Lord Falconer, the constitutional affairs secretary, Sir Andrew Turnbull, the cabinet secretary, and other ministers aimed to tackle troublespots in the government's asylum policy.

The No.10 memo noted: "The prime minister raised the ongoing renegotiation of Nass accommodation contracts, noting that some 25,000 properties were currently lying vacant at a cost of over £100m a year."

"The Home Office was looking to renegotiate the contracts as they did not contain break clauses enabling Nass to cease payments for vacant properties."

"Local authorities were reluctant to relinquish the contracts because of the impact on their budgets but paying for vacant properties was likely to have political repercussions for local authorities as well as central government."

Some of the biggest beneficiaries are Labour-run councils such as Sheffield, Manchester and Glasgow. Under the scheme, 60% of asylum seekers are provided with privately-owned accommodation; the remaining 40% receive council properties.

Private landlords are paid rent directly by Nass. Every penny spent by local authorities on housing asylum seekers is refunded by Nass.

According to the latest statistics, 48,610 of the 76,245 asylum seekers claiming state support were living in taxpayer-funded accommodation in March. That is almost half the 88,855 asylum seekers who were housed and fed by the service in the year ending April 2002 at a cost of £1.05 billion.

One Nass official said: "Nass is paying councils to keep these homes empty because the councils cannot afford not to be paid for them. Obviously this is a scandal. But the whole of Nass is a scandal as far as I'm concerned."

There have long been question marks over the huge sums spent by Nass, which has a track record of mismanagement. Latest figures show it spent £1.1 billion in 2002-3. An official report published last year found it had lost direction, was poorly run and senior staff did not have a grip.

An inquiry is already under way into millions of pounds of contracts granted to landlords around Britain. There was further controversy last year when it emerged the department had commissioned property firms to house asylum seekers in country hotels and mansions.