Islington will be the first education authority to lose most of its services to the private sector and has been ordered to prepare the way for contractors to take over.
David Blunkett, the Education and Employment Secretary, has told the north London council that urgent action is required to tackle the failings found by inspectors.
Private consultants are due to arrive in Islington next week ready for a hand-over of services by the end of the year.
While that work is under way, the education service has been given just days to produce a plan to improve literacy and to take steps to ensure the national strategy is being pursued with the "necessary vigour" by schools.
In the most damning indictment yet of a council's failure to provide adequate services to schools, the report says Islingon is in breach of its statutory duties. It is failing to provide suitable or efficient education; failing to raise standards and it is not monitoring the performance of schools or heads.
Mr Blunkett makes clear that he is prepared to take even tougher action if the council does not meet his deadlines for action.
Islington's own plans to improve are not viewed by DFEE officials as the immediate priority.
The report from the consultants is due by the end of June and services will be put out to tender by the beginning of September.
The OFSTED report, published this week, catalogues a service that has long-standing and fundamental weaknesses. It quotes the chief executive, Leisha Fullick, as saying the council has "largely lost the confidence of the people it serves" and that is especially true of education, which is generally held in low esteem.
Financial problems have dogged the council - savings of pound;32.4 million have to be made over three years - and yet it provides expensive, but inadequate services to schools.
The council - Labour-controlled on the casting vote of the mayor - now has a limited bank of good will, say the inspectors, partly owing to the tendency of councillors to oscillate between expressions of support for schools and vilification of them.
Less than a quarter of 15-year-olds leave the nine comprehensives with five higher-grade GCSEs, compared with around 45 per cent nationally.
Three secondaries and four primaries are failing and another seven primaries have serious weaknesses. Almost a third of pupils in the primaries, mainly the more able, do not go on to the local secondaries.
Leader, 18 COUNCIL OF CONTRASTS
Islington is an area of startling contrasts. The report says some of the most expensive homes in London are to be found only yards from deprived areas with severe social problems of drug abuse, high crime and vandalism.
Around half of pupils are eligible for free school meals, but tests at five suggest attainment at entry is about the national average. However, results at seven and 11 are below average. Test results for 14-year-olds are well below.
By far the worst service is the inspection and advice being provided to schools. Schools are not being adequately monitored or their weaknesses identified. Heads have not been appraised since 1991.
Inspectors are critical of the management of the literacy strategy. They say there has been opposition to the national strategy from some staff and not all schools are doing the literacy hour.
Other areas of poor management include the decision not to go ahead with reducing surplus places, the poor state of buildings and the lack of expertise in assisting schools to set targets for improvement.
WHAT THE HEADTEACHERS SAY
Barry O'Shea, headteacher of Duncombe primary, Archway, and chair of Islington's primary headteachers' forum: "When I started 10 years ago there were 200 children in a terrible school."
"Now Duncombe has 480 pupils on its roll and is oversubscribed. The majority of schools which have been successful have done it very much on their own. Teachers are very good if they are given support, but that has not always happened.
"Ofsted has made an example of Islington and that will cause difficulties when it comes to recruiting teachers."
Sue Seifert, acting headteacher at Montem junior school, Holloway, and an Islington "trouble-shooter": "We all know the report is political. It's about privatisation. I am not opposed to private companies taking an advisory role but am concerned that they could take over in Islington.
"Ofsted's report is accurate but unfair. The inspection and advisory service 'did not work' because schools had to buy into it and some of those which needed the most help could not afford it."
Ann Mullins, headteacher of Highbury Fields: "I have criticisms of the Ofsted report, but I welcome Islington's proposals for a joint venture with a private company.
"I could certainly work with that. I already buy some services from private companies like payroll and personnel, so in many ways (these proposals) are just an extension of that."
John Hudson, head of Holloway, appointed after the secondary school was deemed failing three years ago. It is set to come out of special measures next month.
"I'm interested and very positive for anything that will help us to work together to improve standards in Islington schools. I think we need to have a partnership between schools and teachers and politicians."
John Crew, head at George Orwell, a secondary which is closing in August:
"Islington was left with little choice but to introduce a radical overhaul of its education department.
"It's an opportunity to change and I've got no objections to the proposals. I think you need a radical shake-up. It's a pragmatic approach that Islington is taking. They have pre-empted the Government."