The temporary home for some 32 exceptionally challenging children near Stevenston, North Ayrshire, has been the source of complaints by pupils and staff for some time.
Twenty-three staff, including three senior managers, have been suspended or transferred as a precautionary measure. Police are investigating, along with a team from education and social work departments in Glasgow.
In August, the authority called in the Care Commission and HMI following further concerns. Three out of four pupils are from Glasgow.
In their report, published last week, the inspectors found no key strengths, although they did identify some positive features.
At the heart of their judgment is a serious breakdown between senior managers and education and care staff. More than 150 staff are employed by Glasgow at the school, 23 of whom are teachers. Another 29 support staff are employed by North Ayrshire.
"Relations between most unpromoted care and education staff and their senior managers were strained. Staff felt undervalued by managers," inspectors state.
They described leadership as "unsatisfactory" and report that there are "serious deficiencies in the quality of support, care and education for young people".
Kerelaw had no shared vision to support challenging and vulnerable young people which led to "inconsistent practice and a high degree of tension among staff".
Many staff had only a rudimentary knowledge of child protection issues and felt insecure because they had no guidance on the safe use of physical restraint. There was no alarm system for staff and morale "was very low overall".
An acting principal and depute from outwith the school have been drafted in before the school and the unit close by the end of March.
The city has been in close touch with the Scottish Executive which has confirmed that it is to withdraw plans to expand provision in the secure unit, which houses half the Kerelaw pupils. Glasgow runs the unit on behalf of the Executive.
Ministers wanted to rebuild the secure unit and expand its numbers as part of a raft of measures on antisocial behaviour. Young people who are detained after children's hearings or court orders will now be transferred to other residential units in the west of Scotland.
Charlie Gordon, city council leader, emphasised that it was Glasgow that initiated the external inspection and the city that decided to close the school. "The welfare of the young people in our care is the priority," Mr Gordon said.
A last-minute plea from Unison failed to prevent the decision for closure.
Ronnie Stevenson, a union spokesman, said: "There is absolutely no reason for the city council to wash its hands of Kerelaw in this way. All the evidence suggests that we will need more special placement centres, especially secure units to place children who will benefit from that care.
Both facilities were full prior to the bar on placing pupils there."
Mr Stevenson added: "Kerelaw has been poorly managed and there has been an absence of adequate training, supervision and support but the alternative of placing vulnerable young people in privately run accommodation will be both more expensive and more bureaucratic."