The study found that birth weight dropped by 100 grams on average, and that school attendance fell by an average of 4 per cent in dozens of communities affected by the policy.
More than a decade ago, the Howard government launched its Northern Territory Emergency Response after allegations of child abuse in remote communities, introducing welfare restrictions, widespread alcohol bans and forced land leases.
University of Sydney Associate Professor Stefanie Schurer said the team was surprised by the results and was expecting to see improvements in birth weight and school attendance, which are key indicators of children's wellbeing.
The joint project between the Menzies School of Health Research and the University of Sydney assessed data in 73 communities and 10 town camps where the intervention's Income Management Scheme was rolled out.
"Income management, as it was rolled out as part of the Northern Territory intervention, has definitely had no positive impact on children's wellbeing, if anything it had negative impacts on school attendance, particularly in boys," Professor Schurer said.
"In the first five months that's roughly 2.3 days on average that a child wouldn't be at school."
She said the research team found that babies in utero during the months after the roll-out of the scheme were "sizeably" smaller at birth.
"We think we found a very robust impact of roughly 100 grams of lower birth weight and roughly a 30 per cent increase in the probability of lower birth weight," Professor Schurer said.
The Howard government said the intervention was needed to protect Aboriginal children in the Northern Territory from sexual abuse and family violence.
The income management scheme restricted a large portion of welfare payments to be spent only on essentials such as food, housing and clothing.
Professor Schurer said results for school attendance returned to baseline levels after five months of the scheme's implementation but showed little improvement in the long-term.
Professor Sven Silburn, from Menzies School of Health Research, said using previous studies, the researchers ruled out changes to mothers' use of tobacco and alcohol during the roll-out of the scheme.
Professor Silburn said smaller birth weights could have been attributed to changes in mothers' nutrition, or from additional stress in the household, but said further research was needed.
"When a child is developing in utero, that is the time in a person's life when they are most susceptible to changes in their environment ... and the effects of poverty and stress," he said.
"It raises a lot of questions that need to be carefully considered as the government looks to roll out forms of income management into several other communities."
'We really need to cease this immediately'
Income Management schemes are still being used in the NT, along with other locations around Australia.
The Federal Government this week announced it would proceed with a trial of the cashless welfare card in the Goldfields region of Western Australia and Bundaberg in Queensland, despite separate dissenting reports on the scheme from Labor and the Greens.
The ABC understands the Department of Prime and Cabinet has been briefed on the findings of the study.
Olga Havnen, the chief executive of one of the Northern Territory's biggest health services, Danila Dilba, said income management must be halted until the impacts of the scheme can be further assessed.
"I think as a matter of urgency we really need to cease this immediately until we can get a much better sense of the value and the merit of income management," she said.
"As an Aboriginal Health Service we've worked really, really hard to improve child and maternal outcomes, but this study suggests the roll-out of income management has been very detrimental.
"It [intervention] created a level of fear, mistrust, confusion for many people, so it probably doesn't surprise me that there was a drop in kids in terms school attendance levels."
The Federal Government have been contacted for comment.