Benefits claimants face "unacceptable" variations in the number of payments being docked or removed entirely, depending on where in the UK they live, MPs have said.
The Public Accounts Committee said those penalised for missing job centre appointments or other failings often faced an "appalling situation".
It urged the Department for Work and Pensions to monitor variations closely.
The DWP said policies were "under constant review" to ensure fairness.
It added that recent figures showed the number of jobseeker's allowance recipients facing sanctions had fallen by more than half in the past year.
Meanwhile, less than 1% of those receiving employment and support allowance had been penalised.
More than a million unemployed benefits claimants have to meet certain conditions, such as showing they are looking for work, to receive their payments.
An estimated 400,000 sanctions were imposed in 2015.
The committee said penalties had increased in severity and could have "serious consequences" such as homelessness.
It found the system encouraged some people into jobs but the DWP could not be confident about what sanctions worked best because its data was poor.
The committee's report said: "There is an unacceptable amount of unexplained variation in the department's use of sanctions, so claimants are being treated differently depending on where they live.
"It [the DWP] does not know whether vulnerable people are protected as they are meant to be.
"Nor can it estimate the wider effects of sanctions on people and their overall cost, or benefit, to government."
The committee called for the DWP to trial issuing warnings for first offences and for variations in sanction referrals to be monitored.
Labour MP Meg Hillier, who chairs the committee, said: "Benefit sanctions have been used as a blunt instrument by government.
"It is an article of faith for the Department for Work and Pensions that sanctions encourage people into work.
"The reality is far more complex and the potential consequences severe."
She added: "Some people who receive sanctions stop claiming without finding work, adding to pressures on other services.
"Suspending people's benefit payments can lead them into debt, rent arrears and homelessness, which can undermine their efforts to find work."
A DWP spokesman said: "Our sanctions guidance is the same right across the UK, and the fact is the number of sanctions has more than halved in recent years.
"Sanctions are an important part of our benefits system, and are only used in a very small percentage of cases as a last resort when people don't fulfil their commitment to find work."
The DWP added: "We keep our policies under constant review to ensure that they continue to function effectively and fairly, and where we identify an issue, we act quickly to put it right."