Pupils in small schools do no better or worse educationally than their contemporaries in larger schools, according to inspection agency Estyn.
But while small schools benefit from stronger parental support, their teachers are finding it "challenging" to match work to all pupils' learning needs in mixed age groups, and sometimes even in mixed key stage groups.
And leadership and management are often less effective in small schools, in part because headteachers carry such a heavy teaching load.
The findings on the educational pros and cons of small schools - defined as those having 90 pupils or fewer - come as more local authorities launch proposals for tackling existing surplus places and planning ahead for continuing declines in pupil numbers.
Some small village schools, including those in largely Welsh-speaking areas, are seen as vulnerable because of their higher running costs and sometimes poor buildings and facilities.
Small schools are also prevalent in some of the authorities with the highest numbers of surplus places, such as Gwynedd and Ceredigion.
But such schools have been strongly defended by parents, local communities, and Welsh language activists.
Cris Tomos, one of the parents who took the campaign to save Hermon school in Pembrokeshire to judicial review, welcomed Estyn's conclusion that pupils do as well in small schools.
He suggested that the pressures on the heads of small schools could be relieved if money spent by some local authorities on new "area" schools was used instead to provide video-conferencing links and other equipment to support clusters of small schools working together.
Mr Tomos, who campaigns for Communities in Wales with Small Schools, added:
"If you only have 50 or 60 pupils, parents and governors have greater ownership - it's great in terms of community inclusion.
"We have always argued in favour of the benefits of human-scale education in small schools. It gives young children a sense of belonging and understanding of their immediate environment and builds citizenship."
The Estyn report looked at the educational viability of small primaries, and the quality of outcomes for pupils. Overall, it found little difference in the standards achieved by pupils or in the quality of education provided by small schools compared to larger institutions.
Pupils in small schools did slightly better in speaking and listening, reading, and using ICT. But standards in physical education and physical development were lower, usually because of a lack of outdoor play space.
"Schools of all sizes can provide a high-quality education for pupils," the report concluded.
Small schools also have strengths when it comes to partnership with parents ("generally good") and their general ethos.
But they do less well when it comes to leadership and management, and staff development and curriculum planning also suffer - with one or two teachers having to cover the full range of subject responsibilities. Almost a fifth (293) of Welsh primaries have three or fewer full-time equivalent teachers.
Teaching is also more challenging because of mixed-age classes, and children miss out on the social opportunities afforded by a larger peer group, says Estyn.
Wales has a much higher proportion of small schools than England, with around a third of primaries having 90 or fewer pupils.
For more information, seeSmall primary schools in Wales, www.estyn.gov.uk