It challenges ministers to ensure such children receive help early on and says exam targets and league tables threaten attempts to include them in mainstream education.
The exclusion figures are based on a survey of 22 education authorities in England and Wales, carried out by the Audit Commission, and includes pupils with and without statements of need.
The watchdog calls on the Government to make it harder for schools to expel pupils with special needs who do not have a statement.
Special educational needs: a mainstream issue says funding for under-fives with special needs is "incoherent and piecemeal" despite the emphasis on early intervention.
As The TES revealed two weeks ago, the watchdog is also worried that league tables discourage schools from taking potentially low-achieving pupils and those with emotional and behavioural difficulties who may disrupt classes.
The commission suggests that when judging a school, inspectors should give the same weight to the integration of challenging pupils as they do to academic results.
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