Welfare minister Lord Freud has apologised for "foolish and offensive" remarks in which he suggested people with disabilities could be paid less than the minimum wage.
Labour has called on the Conservative peer to resign after he said some workers were "not worth the full wage".
David Cameron distanced himself from the comments, saying they "were not the views of anyone in government".
Lord Freud said he was "profoundly sorry" and supported the minimum wage.
The row dominated the first Prime Minister's Questions after the conference recess, with Ed Miliband saying the comments demonstrated the Conservatives' "worst instincts".
In response, the prime minister said he "did not need lectures from anybody about looking after disabled people" and urged the Labour leader not "to cast aspersions".
Lord Freud's comments came during a fringe meeting at the Conservative conference last month when he was asked whether it was preferable for someone with a disability, who could not get a job, to be paid less than the minimum wage - and to have their income topped up with benefits - in order to give them the experience of work and boost their self esteem.
'£2 an hour'
In response to the question, from Conservative councillor David Scott, he reportedly said there "was no system for going below the minimum wage".
But he added: "Now, there is a small… there is a group, and I know exactly who you mean, where actually as you say they're not worth the full wage and actually I'm going to go and think about that particular issue, whether there is something we can do nationally, and without distorting the whole thing, which actually if someone wants to work for £2 an hour, and it's working can we actually…"
Analysis: By Damon Rose, from the BBC's disability blog Ouch!
Unemployment for disabled people has remained stubbornly around 50% for over twenty years despite schemes and incentives. It's perhaps understandable that Lord Freud might want to think outside the box to allow desperate disabled people to shine and get a real job with a real (if low) wage which for some may be preferable to remaining at home, isolated, looking forward to a life on benefits.
If disabled people could charge less for their time, they might get a job more easily... but it could also send out unhelpful messages and devalue all disabled workers.
Suggesting that disabled people may not be worthy of what's deemed to be a "minimum" wage is seen by campaigners as unacceptable, as Conservative MP Philip Davies found to his cost in 2011. Equal rights, equal pay are bound up in law and feel right and just.
Lord Freud sounds like he was raising an important debate, but has muddied the waters with what sounds like disrespectful language. And as a minister responsible for controversial welfare reforms, campaigners have been quick to claim it is a troubling insight into how he thinks.
Labour circulated a transcript of remarks and a partial recording, just before PM's questions began.
Raising the issue in Parliament, Mr Miliband said: "These are not the words of someone who ought to be in charge of policy relating to the welfare of disabled people.
"Surely someone holding those views can't possibly stay in his government?"
But Mr Cameron said these were not the views of the government.
"We pay the minimum wage, we are reforming disability benefits, we want to help disabled people in our country and we want to help more of them into work. And instead of casting aspersions, why does he not get back to talking about the economy."
In a statement Lord Freud, a former banker who has been a minister in the Department for Work and Pensions since 2010, offered a "full and unreserved apology".
"I was foolish to accept the premise of the question," he said.
"To be clear, all disabled people should be paid at least the minimum wage, without exception, and I accept that it is offensive to suggest anything else."
Lord Freud said he "cared passionately" about disabled people and was proud "to have played a full part in a government that is fully committed to helping disabled people overcome the many barriers they face in finding employment".
No 10 said Lord Freud had done the "right thing" in apologising while disability affairs minister Mark Harper said his colleague had "made a mistake in the language he used" but backed him to "carry on with his work".
But Labour said the apology was "not the end of the matter" while the Liberal Democrats said the remarks were "completely unacceptable".
The BBC's political editor Nick Robinson said it was important to understand the context of the conversation and that Lord Freud was not arguing for a new policy of routinely paying people less than the minimum wage.
He said one interpretation of Lord Freud's comments was that he was "thinking aloud" but suggestions that the minimum wage could be undercut would seem "heartless" and come back to "haunt him".
A former adviser to the last Labour government, Lord Freud has been closely involved in the coalition's implementation of major benefits changes, such as the replacement of the disability living allowance with the personal independence payment and the rollout of Universal Credit, a consolidated single payment designed to encourage work.
Among disability campaigners to criticise Lord Freud, Mencap, which supports those with learning disabilities, said he "seems to be saying that the work that disabled people do has less value than the rest of the population".
Susan Scott-Parker, chief executive of the Business Disability Forum, said the comments revealed a "deep-rooted, negative view".
She added: "His mistake was in not realising that the question should not have been answered in the first place."
But Mr Scott, a councillor in Kent, defended Lord Freud's response, saying there were examples where the minimum wage "precludes a small number of physically or mentally disabled from working".
The minister, he suggested, did not intend to "undermine" the minimum wage but to endorse a system for getting certain people into work which would "help their own well-being".