The research by the Sports Council for Wales found that fewer hours per week are being given to PE.
It also says that there is not enough recreational sport and that resources are poor.
The study, Time out; Is PE out of time and out of resources? said that, as children get older, there is less and less opportunity for exercise.
The situation has deteriorated so much that the average weekly teaching time available for PE in secondary schools has dropped from 694 minutes in 1974 to an all-time low of 512 minutes today.
Two-thirds of schools offer less than 90 minutes a week to their Year 10 pupils.
Last month researchers from Leeds Metropolitan University found that more than half a million hours of PE have been lost by English primary schools, thanks to the slim-down of the primary curriculum which made room for the literacy and numeracy hours.
Now the Welsh Sports Council has said the National Assembly must move to protect PE and avoid long-term health problems for a generation of schoolchildren.
The council's chief executive, Dr Huw Jones, said the study was a warning signal that the poor state of PE in Wales needed to be tackled urgently by the Assembly.
Dr Jones said: "PE's place on the school curriculum must be protected in order to reverse the downward trend identified in this report and avoid its worrying impact on the long-term health of today's children and young people."
"We need more time allocated in school timetables and more training improvement in the teachers who deliver the subject, in both academic and recreational forms."
A recent report by the Office of her Majesty's Chief Inspector of Schools in Wales found that half of Welsh primary schools' PE lessons were unsatisfactory and that pupils were overweight and unfit.
The Time Out report is available for pound;3 from the Sports Council for Wales on 01222 300570