Children’s social services are being engulfed by a funding crisis in which nine out of 10 local authorities are struggling to meet their legal duties and families face a postcode lottery, a damning report has concluded.

The inquiry by MPs, led by a former Conservative children’s minister, Tim Loughton, has found “wildly different approaches” in the ways that councils intervene and how likely they are to take children into care.

The report – shared exclusively with the Guardian – found that in one part of the country (Blackpool) more than seven times as many children were being taken into care than in another (Richmond in London).

It also cited a tenfold difference in the numbers being referred to services in the first place: from 187 per 10,000 children in one area to a massive 1,753 in another.

The report, by the all-party parliamentary group for children, also suggested that councils were coping with a spending squeeze by tightening up the criteria by which they classify a child as being in need – cutting thousands out of the system altogether.

One council told MPs that the numbers of children in need was being “grossly under-reported” because of “the reality of rapidly rising thresholds that arise from reducing resource”.

Loughton said the inquiry had revealed that children’s services were stretched to the limit “and in many cases on the brink” and called on the government to urgently investigate the “extraordinary differentials”.

“Any vulnerable child deserves the same protections and interventions wherever he or she lives in the country – but clearly, from such a huge divergence in outcomes, this is not happening,” he said.

Anna Feuchtwang, the chief executive of the National Children’s Bureau, which supported the inquiry, suggested that the result could be children unnecessarily separated from their families.

“If the government doesn’t adequately fund children’s social care, more children and families will be left to fend for themselves as their problems escalate to crisis point. A system that only steps in once a child is in dire need is both costly and cruel. It means, for example, that children could end up in care or experience abuse when providing support earlier could have kept them with their family,” she said.

The report found that differences in demography or resource did not come close to explaining the massive variations. Instead it concluded: “Crucially, local policy decisions are leading directly to stark contrasts in children’s outcomes, including the likelihood that they are taken into care.”

One worrying finding was that early intervention was being cut, meaning families were ending up in crises before receiving help. Moreover, councils faced a recruitment nightmare, with one revealing a 57% vacancy rate, forcing heavy reliance on temporary agency staff.

The situation has become so acute that a survey carried out by the MPs found that overall 89% of directors of children’s services were finding it increasingly difficult to fulfil their statutory duties towards vulnerable children.

Loughton warned that the area had become a “Cinderella service” because vulnerable children were not seen as “everybody’s business” while the idea of growing old and needing adult social care was.

Asked if he feared a repeat of the death of 17-month-old Peter Connelly, initially known as Baby P, Loughton argued that cases were happening all the time but not being reported.

“When I was children’s minister every Monday we went through a list of children who had been attacked or killed and there were terrible cases that didn’t make the headlines. It was two kids a week being killed at the hands of carers,” he said.

He said that £1 was being spent on preventative help compared with £4 spent on reactive services, arguing the opposite should be true.

The Local Government Association responded by warning that councils faced a £1.9bn funding gap for children’s services by 2020, and said that time was running out to find savings without a “lasting impact” on critical services.

“Councils have been warning government for some time that the pressures facing children’s services are rapidly becoming unsustainable, with a combination of government funding cuts and huge increases in demand leaving many areas struggling to cope,” said Cllr Richard Watts, chair of the LGA’s children and young people board.

Whatever the pressures, he said, it was important to recognise that social workers continued to provide “heroic levels of support” – taking tough decisions to save children’s lives.

Labour’s shadow children’s minister Emma Lewell-Buck, herself a former social worker, said: “This report is alarming but sadly not surprising, given how hard the council cuts have hit children’s social care…

“Instead of learning the lessons, addressing those failures and protecting services from cuts, the department has focused on a few short-term projects in a few local authorities through the so-called innovation fund. So it is no surprise that this piecemeal approach has led to an even more fragmented and inconsistent service for our most vulnerable children and families.”

A Department for Education spokesperson said: “We want every single child, no matter where they live, to receive the same high quality care and support – and this is exactly what our reforms are set up to deliver. We are clear that providing help as early as possible is the most effective way of keeping children safe, and our new What Works Centre for children’s social care will ensure social workers across the country are able to learn from best practice.”

The DfE argued that the department had taken “tough action” where councils were failing children, and was supporting the recruitment and training of social workers.