Consultants KPMG, sent into the authority by ministers, have recommended a major overhaul of the education department and the recruitment of a permanent chief education officer. They also want the council to prepare to hand over most of its services to outside contractors.
Estelle Morris, school standards minister, said: "The authority is seriously failing in its role to support the raising of standards in Liverpool schools. The consultants recommended radical changes, some of which must take place immediately.
"Liverpool has failed its schools for many years. There can be no doubt that a radical solution is needed if this is to change. That is why both we and the city council jointly accept the consultants' recommendation to prepare to contract out the city's education service."
A decision on who will take over the services will be made by Christmas.
OFSTED criticised the council for funding education poorly and failing to identify and provide adequate support for its weakest schools. The city has 13 failing schools and inspectors identified 12 more with serious weaknesses.
Frank Cogley, the chief education officer, took early retirement following the report which was published last month.
Graham Lane, education chairman of the Local Government Association, said the city's OFSTED report was not as bad as ministers were suggesting.
He said: "I am very worried. The interpretation of the report is much harder than is warranted.
"The idea that private companies can turn round schools and raise standards is a nonsense. Liverpool has not even been given a chance to react to the report's recommendations.
"It is too late to leave it to Christmas; staff will just leave. The LGA will be taking legal advice on what services can be contracted out."
Mike Storey, the leader of Liverpool council, said it was clear that major changes were needed in the city: "These changes will involve outsourcing the directorate's quality assurance services, and possibly the education welfare service, and other services will be considered for possible outsourcing within the next five months."