The fund, which aims to develop the labour market and encourage lifelong learning, equal opportunities and entrepreneurship, stifles some providers and places a burden on local authorities, government offices and other public and voluntary organisations.
The report, by the House of Commons work and pensions committee, names two concerns: the bureaucracy associated with its administration - one project with 12 trainers needed five support staff for paperwork - and uncertainty about funding, particularly after EU enlargement.
The reduction in funding after 2006 means some providers "will face such a catastrophic loss of funding that they will be forced to close or dramatically scale back".
The MPs recommend the Government uses next year's comprehensive spending review to remove much of the uncertainty.
European Social Fund, sixth report of session 2002-03. ISBN 0 215 01353 0