Ford called the move a "coup d'etat" and vowed an "outright war" in next year's mayoral election.
"What's happening here today is not a democratic process, it's a dictatorship process," the 44-year-old mayor declared.
The council lacks the power to remove Ford from office unless he is convicted of a crime. Instead, members sought the strongest recourse available after recent revelations that Ford smoked crack cocaine and his repeated outbursts of erratic behavior.
The council voted overwhelmingly in favor of slashing Ford's office budget by 60 percent and allowing his staff to move to the deputy mayor, who now takes on many of the mayor's former powers. Ford now effectively has no legislative power and no longer chairs the executive committee, although he retains his title and ability to represent Toronto at official functions.
The debate became raucous after Ford paced around the council chamber and traded barbs with members of the public. The speaker asked security to clear the gallery and a recess was called, but not before Ford barreled toward his detractors, mowing into Councilor Pam McConnell.
Another councilor asked Ford to apologize. Ford said he was rushing to the defense of his brother, Councilor Doug Ford, and accidentally knocked McConnell down.
"I picked her up," he said. "I ran around because I thought my brother was getting into an altercation."
Visibly shaken after Ford ran her over, McConnell, a petite woman in her 60s, said she never expected the chaos that broke out.
"This is the seat of democracy. It is not a football field. I just wasn't ready. Fortunately, the mayor's staff was in front. They stopped me from hitting my head against the wall. I just need to sit down," McConnell said.
The motion to strip Ford of his powers was revised from a tougher version to ward off potential legal challenges by letting Ford keep his title and represent the city at official functions. The city's lawyer said Ford was not reduced to being "mayor in name only."
"Obviously I cannot do the job with eight people in the office with a quarter of the former mayor's budget," Ford said.
Council members said it was necessary to restrict the mayor's powers given his erratic behavior.
"Mayor Ford has had many choices. ... Would he change his behavior? Would he step aside and seek help?" said Councilor John Filion. "The mayor unfortunately has chosen the path of denial. Now it's time to take away the keys."
"The new allegations pile up faster than the old ones can be dealt with. If many Torontonians were initially fascinated by the drama, they are now fed up with it. They want it to end," Filion said.
Far from being chastened, Ford has vowed to take the council to court and insists he will seek re-election next year.
"It's a coup d'etat - that's all this is," Ford said as he arrived at City Hall on Monday morning.
He earlier claimed on a radio station that councilors were against his agenda to save taxpayers money. "If they want me out, they should just call a snap election," Ford told radio station AM640.
However, the council rejected a motion proposing such an election, and also refused to give Ford another month to get an expert medical opinion on whether he was capable of carrying out his duties.
Councilor Denzil Minnan-Wong, a former Ford ally, said it's about his conduct.
"This is about embarrassing the city, his involvement with gangs, his involvement with crack cocaine. This is about his admission that he gets behind the wheel while drinking," Minnan-Wong said.
"He's the worst spokesman for the city of Toronto right now."
Toronto, a city of 2.7 million people, has been abuzz with the Ford melodrama since May, when news outlets reported that he had been caught on video smoking crack.
Recently released court documents show Ford became the subject of a police investigation after those reports surfaced. Ford, who denied there was any incriminating video, now acknowledges the reports were accurate.
In interviews with police, former Ford staffers have made further accusations, saying the mayor drank heavily, sometimes drove while intoxicated and pressured a female staffer to engage in oral sex.
On Thursday, Ford spouted an obscenity on live television while denying the sex allegation, saying he was "happily married" and using crude language to assert that he enjoys enough oral sex at home.
Last week, after admitting to excessive drinking and buying illegal drugs, Ford disclosed that he is seeking medical help. But he and his family insist he is not an addict and does not need rehab.
Prime Minister Stephen Harper - like Ford a Conservative - was in Toronto on Monday to meet with area Parliament members from his party. Harper's office issued a statement which said the latest allegations against Ford "are troubling."
"Our Government does not condone illegal drug use, especially by elected officials while in office," it said.
Ford and his brother made their debut on a current events television show broadcast Monday night called "Ford Nation" on the conservative tabloid Sun News Network in Canada.
Rob Ford told viewers they would see a change in him over the next few months. "I'll take a urine sample right now," Ford said on the show which was taped Sunday.
Ford later laughed when "Ford Nation" showed a clip from U.S. comedian Jon Stewart's "The Daily Show" that lampooned the mayor's recent remarks about oral sex.
With Ford refusing to step aside, even temporarily, the City Council took its first steps to weaken his powers on Friday, voting 39-3 to suspend his authority to appoint and dismiss the deputy mayor and the executive committee. The council also voted to give the deputy mayor authority to handle any civic emergency.
Ford was elected three years ago with overwhelming support from Toronto's conservative-leaning outer suburbs, where many voters felt angry about what they considered wasteful spending and elitist politics at City Hall. He campaigned on promises to "stop the gravy train" by curbing public spending and keeping taxes low.
Associated Press writers David Martin and Charmaine Noronha contributed to this report.