Robert Jenrick has threatened to send in appointed commissioners to run parts of Liverpool City Council after its "multiple apparent failures".
It comes as former mayor Joe Anderson told Sky News he does not accept the portrayal of the way the city has been run.
Local government secretary Mr Jenrick said a report into the Labour-run council paints a "deeply concerning picture" with a "pervasive and rotten culture".
He told the Commons about instances of documents left in skips or destroyed, the awarding of "dubious" contracts and an "environment of intimidation" in which staff were forced to not question decisions.
Mr Jenrick said "given the gravity of the inspection findings" he is proposing to transfer "all executive functions associated with regeneration, highways and property management at the authority to the commissioners" appointed by him if the council does not come to him by 24 May with sufficient plans to improve processes.
They would be in place for a maximum of three years if sent in and will report back to Mr Jenrick every six months, he said.
It would be only the fifth time a "statutory intervention" took place and is regarded as a "last resort".
The report also found there was a failure to carry out due process in planning and regeneration including a "worrying lack of record-keeping".
"Indeed, documentation had sometimes been created retrospectively, discarded in skips or even destroyed," Mr Jenrick told the Commons.
He also said it found there was a "lack of scrutiny and oversight across highways", including "no coherent business plan and the awarding of dubious contracts".
There was a "continued failure to correctly value land and assets - meaning taxpayers frequently lost out," Mr Jenrick added.
Shadow communities secretary Steve Reed assured the people of Liverpool, which has not had a Tory councillor elected since 1998, that this would not be a "Tory takeover" and he supports the plan "to advise and support elected representatives in strengthening the council's systems".
The report was compiled by local government inspector Max Caller who has been investigating irregularities in the awarding of building contracts in the city after he was appointed by Mr Jenrick in December.
His team were sent in to Liverpool City Council following the arrests in December of five men, including elected mayor Joe Anderson, who was held on suspicion of conspiracy to commit bribery and witness intimidation.
Mr Anderson, who stepped aside from his mayoral role last year, has denied any wrongdoing.
He is still under investigation but had his police bail conditions expired this week.
He said of the report's findings: "It's not a true reflection of the council I know - I'll be reading the report fully and commenting further then."
He added: "The people of the city see the regeneration, the jobs, the new schools we have delivered - what was said today doesn't see the whole picture.
"I was surprised because we had processes in place, I don't recognise the culture of intimidation they described. If you have a problem you go to HR like anywhere else."
The council's director of regeneration, Nick Kavanagh, was also arrested as part of the police probe into building and development contracts in the city, and this week it was confirmed he had been dismissed from his role.
In a statement to the Liverpool Echo, he said he intended to clear his name at a tribunal.
Merseyside Police said all suspects remain under investigation but bail has not been extended.
Local elections, including a vote to elect a successor to Mr Anderson, are due to take place on 6 May.
Reacting to Mr Jenrick's announcement, Liverpool City Council said it takes the report findings "extremely seriously".
"Crucially, Max Caller has made it clear that he believes the organisation has already taken steps to address the issues, since the arrival of chief executive Tony Reeves in 2018," it said in a statement.
"The council has pledged to address all of the concerns raised and continue its journey of improvement.
"The council's improvement plan will be published after the local elections."
Analysis: A brutal day for a city that likes to do its own thing - and has a difficult relationship with the Tories
By Tom Parmenter, North of England correspondent
They stopped short of a full on takeover but this is was a brutal day for the city of Liverpool.
The inspectors have called out a "dysfunctional" and "rotten" local authority and recommend three years of special measures.
The team of commissioners will have limited powers and work with the current Chief Executive Tony Reeves - a man who described himself to me today as "boringly straight".
The government has decided he is the right man to lead the rebuild of the council's reputation alongside the commissioners being sent in soon.
But the very act of a Conservative government intervening in the running of a predominantly Labour city doesn't sit well with many Liverpudlians.
The reasons why go back several decades - the recession of the 80s, industrial decline, Thatcher, Hillsborough, austerity- there are others. It is a difficult relationship that's now entering a new phase.
"It's a bit rich them lecturing us," one hacked off resident told us on the waterfront.
"Them and us" is just how many people here see it.
Above all, this famous city likes to do its own thing - but for the next three years it won't be that straightforward.