Thousands of the most vulnerable children have been left to struggle in the classroom because the budget to support them has been swallowed up by paperwork, a damning report from the Audit Commission will conclude next month.
The financial watchdog says most children with special needs such as dyslexia, autism and behavioural problems are denied help thanks to the weight of the bureaucracy.
Its report says that statements of special educational needs, the formal contracts which spell out the help required for pupils with the greatest difficulties, are bureaucratic and do not work even for many of the 3 per cent who receive them. The rest are neglected.
The influential body charged with holding local government to account will call for a major overhaul of how schools look after the 1.5 million children in England and Wales with special needs, and will urge ministers to begin a national review.
The number of pupils with statements should be greatly reduced, it argues. The current system "adds little value" and many children suffer for years before their problems are picked up. Even then the "costly, bureaucratic and unresponsive process" leaves families with no guarantee that their children are getting help.
Of the pound;3.6 billion special needs budget, 70 per cent is spent on preparing and implementing statements for the most needy 3 per cent. Local authorities spend more than pound;100 million a year writing statements.
The 1 per cent of children whose needs are so severe they require a special school would continue to receive statements.
The commission criticises health and social services for failing to support schools, and condemns the wide variation in support.
The past two decades have seen a huge rise in the number of children requiring special help. More than 3 per cent - 282,000 - are now judged to have problems so serious they require a statement, and roughly one in five pupils has some level of special need.
"In the longer term the statutory framework is intrinsically unsustainable, as it is inconsistent with the reality of today's system of education," the Audit Commission says.
The report, Statutory Assessment and Statements of Special Educational Need, a policy paper, will be followed by a full Audit Commission investigation later this year. The commission appears to have stepped back from an earlier proposal that statements should be scrapped, but the plan to cut the number has alarmed parents.
The country's leading special needs support group, the Independent Panel for Special Education Advice, condemned the report as a cost-cutting exercise, warning that schools could be forced to exclude thousands of difficult pupils if the system is dismantled.
John Wright, chief executive of IPSEA, said spending on statements was justified: "Thousands upon thousands of children will be excluded from school if these recommendations are accepted. There won't be any education at all for them because mainstream schools without the investment and expertise brought by a statement won't be able to cope.There will be thousands of children out of school."
Pupils with special needs were three times as likely to be excluded as their peers, he added.
The Audit Commission would not comment before the report's official publication.
* Statements are bureaucratic and ineffective.
* Of the pound;3.6 billion special needs budget 70 per cent is spent on the most needy 3 per cent of pupils.
* Most pupils with less severe problems are neglected.
* Statements "add little value" to the education ofchildren who receive them.
* A big reduction in thenumber of statements.
* A national review of how schools cope with children with special needs.
* Official figures this week showed a small drop in the number of pupils with SEN and in the number given statements.
"The availability of resources and specialist staff determines the provision, not the needs of these vulnerable children," said Phil Willis, LibDem education spokesman.