In an interview with Newsweek magazine, excerpts of which were published Wednesday, Steinbrück said the British government's switch from financial prudence to heavy borrowing was "breathtaking" and "crass Keynesianism."
He accused Prime Minister Gordon Brown's administration of "tossing around billions" with its £20-billion stimulus plan to cut tax on goods and services, funded by borrowing more and increasing taxes after 2011.
It is highly unusual for a diplomat to be so publicly critical of an ally's policies, and Steinbrück's remarks will only add to simmering tensions between Britain and Germany on the eve of a European Union summit.
"Our British friends are now cutting their value-added tax. We have no idea how much of that stores will pass on to customers. Are you really going to buy a DVD player because it now costs £39.10 instead of £39.90?" Steinbrück told the magazine.
"All this will do is raise Britain's debt to a level that will take a whole generation to work off. The same people who would never touch deficit spending are now tossing around billions. The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking."
He added: "When I ask about the origins of the crisis, economists I respect tell me it is the credit-financed growth of recent years and decades. Isn't this the same mistake everyone is suddenly making again, under all the public pressure?"
But Brown on Thursday dismissed sharp German criticism of British policy on handling the financial crisis as being the result of "internal German politics." He insisted that Germany was also investing heavily in its economy and carrying out policies similar to London's.
"The German government is investing more, they've just announced a fiscal expansion so that they can invest in public works, and helping their banks and doing these sort of things," Brown told LBC radio.
"I don't really want to get involved in what is clearly internal German politics here because they're a coalition in Germany with different political parties.
"I think the important thing is almost every country around the world is doing what we have been doing," in terms of supporting ailing banks and providing fiscal stimulus, the prime minister said.
Steinbrück's comments were highly unusual given that they were so publicly critical of an ally's policies and are likely to add to tensions between Britain and Germany on the eve of a European Union summit on tackling the crisis.
EU leaders will meet Thursday and Friday aiming to put the final touches on economic stimulus plans, amid tension between Germany and its French and British partners.
France, which holds the European Union's current presidency, and London have united in a push for an extensive stimulus package.
Germany, one of the few EU countries heading into the current downturn with strong public finances, has been fighting off pressure to make a bigger effort to boost the European economy.
The divergences rose to the surface on Monday when Britain's Brown, French President Nicolas Sarkozy and European Commission chief Jose Manuel Barroso met without Germany's Angela Merkel in London.