Immediate action must be taken to close the growing gulf between popular and unpopular schools, a report by inspectors says.
The hard-hitting study on school places by the Office for Standards in Education urged local authorities to challenge restrictive admission policies at oversubscribed schools and said problem pupils should be distributed more equally.
The education watchdog also said councils could not engineer school intakes to be more racially or religiously diverse.
The inspectors found that relationships were often unsatisfactory between councils and schools that controlled their own admissions such as foundation (formerly grant-maintained) schools and, to a lesser extent, faith schools.
They urged councils to challenge these schools if they were oversubscribed and had restrictive admissions criteria. Such admissions policies could "exacerbate social tension" and "divorce a school from its local community", the inspectors said.
Ofsted gave the example of an unnamed Church of England school in a deprived area which it said only took a tiny proportion of pupils from its local community.
It disagreed with the recommendations of a group established by David Blunkett, Home Secretary, that investigated the causes of riots in Bradford and northern towns in 2001. The Community Cohesion review team proposed that, in multi-cultural areas, schools should avoid taking more than 75 per cent of pupils from any one culture or ethnic background.
However, Ofsted said this was neither "practical nor desirable" and the focus should instead be on creating better links between schools with different intakes.
The inspectors said there was no simple way to end the increasing polarisation of schools, but that it was possible. They recommended that councils should:
* be wary about expanding popular schools because it could make others spiral into decline;
* share out challenging pupils more fairly;
* act to prevent unpopular schools from declining further, either by providing extra support, shutting them, or giving them a fresh start;
* get housing, education and other departments to work more closely together.
* Improve school organisation plans, the strategies every local authority draws up to plan school places. Inspectors said most plans were "a rather dull bureaucratic exercise" instead of a tool for social inclusion.
The inspectors said they recognised that the polarisation of schools was exarcerbated by parental preferences, a lack of willingness by councillors to make unpopular decisions, such as closing and merging schools and the defensive attitudes of schools .
"Few issues in education arouse more passion and upset than school places," the inspectors said.
"Schools can be a force for inertia, exhibiting a marked reluctance to embrace change."
Ofsted recommended an investigation into whether urban schools' admission problems should be tackled through a board which would take over from local authorities.
Plans for a London-wide admissions system were also supported this week by the chief schools adjudicator Philip Hunter.
However, Dr Hunter warned MPs that such a scheme would be expensive and certainly go wrong at some point because of the scale of the problem.
The chief adjudicator said he was concerned about the soaring number of complaints about popular schools - particularly foundation schools - flouting the national code of practice for admissions.
In the past year adjudicators have backed 73 complaints about schools for giving too little preference to children in care, or too much to children of staff.
Dr Hunter said social divisions between schools were inevitable: "Left to their own devices schools will tend to drift to the posh end of the spectrum."
The Reverend Canon John Hall, general secretary of the Church of England's education board, said faith schools should be a force for inclusion and pointed put that only one or two CofE schools still had restrictive admissions.
George Phipson, general secretary of the Foundation and Aided Schools National Association, said Ofsted appeared to be part of a "witch-hunt" against schools that control their own admissions.
He said Ofsted's concerns about foundation schools were out of date because their admissions are set to come under local authority control in 2004 or 2005.
The "School place planning" report is at www.ofsted.gov.uk