"Austerity is making an already bad economic situation far worse in the UK and across large parts of Europe. Cuts to social security and public services are combining with falling incomes and rising unemployment to create a deeply damaging situation in which millions are already struggling to make ends meet," said Max Lawson, Oxfam's head of advocacy.
Oxfam said that unemployment is too high, wages are falling fast and one in ten working households in Europe now lives in poverty, which could get worse as austerity grips the continent.
The charity uses the EU's official definition of poverty to determine what it means to be poor. According to the EU, people are living in poverty if their resources and income are so inadequate that they experience multiple disadvantages through unemployment, low income, poor housing and barriers to learning, culture and sport. They are often marginalized, becoming isolated from family and friends and may struggle to buy basic necessities.
(Read more: Europe's austerity revolt forces easing on cuts)
While some positive economic data has come out of the euro zone in recent months, unemployment remains a key issue. In July, the jobless rate in the euro zone stood at 12.1 percent. Among the under-25s, the rate was higher at 24 percent.
The warnings come ahead of a meeting of European Union finance ministers in Vilnius on Thursday to discuss the banking union and economic outlook of the 28-nation bloc.
World leaders need to rethink their approach to austerity, according to Oxfam.
(Read more: Barroso hails EU recovery, MEPs slam 'fairy tale')
"The only people benefiting from austerity are the richest 10 percent who have seen their share of income rise whilst poorest have seen their share fall," Lawson said.
"The U.K., Greece, Ireland, Italy, Portugal, Spain - countries that are most aggressively pursuing austerity measures - will soon rank amongst the most unequal in the world if their leaders don't change course."