Barnardo's claims the refusal to allow asylum seekers to work means their children often have to live in damp and unsafe housing, and suffer racial abuse and problems accessing education.
The charity is calling on the government to give asylum seekers who have been in the UK more than six months the right to work.
In a report, Like Any Other Child?, it argues that action is needed to mitigate the impact of an asylum backlog that may not be cleared until 2011.
Martin Narey, the chief executive of Barnardo's, said: "We do not oppose asylum policy and recognise that under the new procedures many families will be removed from the UK speedily.
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