I've been contacted by an agency about a contract position that sounds interesting. The hitch is that is pays hourly (W-2) but no benefits.

Isn't it one or the other? I know the fed has some pretty specific ideas about what a 'consultant' working relationship looks like (usually not on-site, has own insurance and tools, pays their own taxes, etc.). This position looks like a Consulting role to me.

The fed is tough on those regs because they prefer 'employee' status, whereby the employer withholds/pays the taxes (on behalf of the employee), provides direction, tools, and usually benefits to some degree.

Has anyone heard of a contract agency hiring a Contractor as a W-2 employee with no benefits?

This is a reputable agency.

Is this standard practice now?

This isn't all that uncommon when companies are dealing with individuals rather the corporations. I don't know of any legal requirement to provide benefits for w-2 employees. Anyway if the hourly rate is high enough the benefits won't matter.

I've maintaned a W-2 contract relationship for many years. The business model provides the company with a pool of highly flexible, can-work-on-1-day-notice, non-supervised labor. The contract states that I understand they are not to be considered my sole source of income. Although they offer benefits, premiums are shared expenses. If you work a steady schedule this is great! Yet contractors for this firm often work a few days and then may not work for weeks or months. So premiums could exceed income that pay period.
This relationship can be a good supplement for independents, but should either provide enough work (rarely any guarantees of this) or be viewed as 'filler' on days you do not have booked with direct contract or W-9 work.
-Anne

Of course. It's just a question of how they prefer to process payroll. Anyone could have W-2 (rather than 1099) and not have benefits. What you receive from a company for compensation (money, benefits, paid leave, etc.) is a separate issue from how they dispense the compensation.

I found it rather handy when a university hired me as an hourly consultant, but took care of my taxes.

Thanks for the feedback. I should have mentioned that this is a full-time position ... 40 hours per week, which means I wouldn't be able to do any other work. If it were sporadic, I suppose I'd be okay with it ... but for a full-time committment it seems off. And the hourly rate is not great ... $40/hour.

Thanks for the feedback.