Leicester is the second authority in six months to be credited with dramatically improving its services without being forced to hand them over to private contractors.
The Office for Standards in Education listed a catalogue of weaknesses in July, 1999, but returned to find the city council had made "considerable progress" and is now well-led.
After the previous inspection, the Government intervened to impose a public-sector approach to Leicester's failings, but threatened privatisation should this fail.
A new director of education, Steven Andrews, was appointed from the Department for Education and Employment in May 2000.
A government-funded "partnership board", chaired by Professor David Hopkins, of Nottingham University, and including several headteachers, was also set up to monitor the authority's performance.
Inspectors said the new arrangements had borne fruit. Strategic management of the authority, previously a key weakness, was now "sound". Both Professor Hopkins and Mr Andrews were providing good leadership.
The inspectors also said that schools' onfidence in Leicester was growing, partly because councillors have pledged to increase spending for the next three years.
"A shared agenda, with raising standards at its heart, is emerging," said inspectors. They added that the authority now had the capacity to continue recent gains. But they emphasised that improvement was "fragile" in places, with several functions still performed unsatisfactorily.
Ministers will use Leicester's improvement as evidence of the success of the Government's intervention strategy for failing councils.
In December, OFSTED said services in Liverpool had been turned around by a public-sector approach. Then, in March, private contractor Cambridge Education Associates won praise for transforming services in Islington, north London.
But this week inspectors delivered a more mixed report on another authority subject to intervention.
OFSTED said Labour-controlled Doncaster council, which had many weaknesses when inspected in September, 1999, was benefiting significantly from a partnership with Warwickshire.
Key weaknesses in strategic management remained, however. Inspectors said they doubted whether the improvements were sustainable without continuing support, and have promised to return.