Only children with the severest special educational needs would be given legally binding statements mapping out their education provision, under radical plans put forward by Assembly members.
The proportion of children subject to statements would fall by more than two-thirds from 3.3 per cent (16,519) last year, to between 0.5 and 1 per cent of all pupils.
Instead, special, or "additional" needs children not found to have severe or complex needs would be assessed annually by professionals from a range of agencies.
The new report, published this week by the Assembly's education, lifelong learning and skills committee, also proposes creating centres of excellence for teaching SEN children in mainstream schools.
But the report has upset parent-teacher groups, who fear their children's education could suffer if statementing is reduced.
Margaret Morrisey, spokesperson for the National Confederation of Parent Teacher Associations, said: "It all sounds so good, but where is the proof that the funding will not have to come out of school budgets?
"Most parents want their children to have statements because they want a legal guarantee they will receive the best education.
"Parents need to know a lot more about how much more money is going to be stumped up for this - and by whom."
The education committee has been investigating statementing over the past year, and heard evidence that the process can be costly, time-consuming and unfair. Its review followed a fact-finding trip to Scotland, where statements have already been slashed in favour of more school-focused and inclusive provision.
Critics, including health professionals and teachers, claimed the children of "pushy and academic parents" were more likely to get statements after threatening legal action. And local government representatives wanted them replaced with a "record of entitlement".
But a poll carried out for the committee, of parents and professionals, found 65 per cent wanted to keep statements. Just 10 per cent wanted them scrapped altogether.
Gareth Jones, head of Ysgol Belmont in Buckley, and chair of the North Wales Federation of Special Education Head Teachers, claimed controversy around statements was a "red herring".
He said: "The amount of money given by local authorities depends on which band a pupil falls in. Those with the most complex and severe needs, already in a special school, will need more funding."
He welcomed the focus on more additional-needs learning in mainstream schools in the report. However, he said teachers reluctant to see additional needs as part of their job would have to accept more responsibility.
The education committee report says mainstream schools should be encouraged -with pump-priming funding - to work in clusters and share good practice.
Special units within clusters should be developed as centres of excellence for SEN teaching, becoming role models for others. SEN children with first-language Welsh would also benefit, with assessments in Welsh becoming a right for all.
The Assembly committee recommendations will now be considered by Jane Davidson, education, lifelong learning and skills minister .
Peter Black AM, chair of the education committee, said the recommendations addressed present inequities. Launching the report, he added: "The views of children and young people with SEN, and their parents, are vital in helping schools and local authorities to improve and refine their support."
The committee will start work next year on the third part of its review of special needs, looking at transition issues.
Local spending on SEN rose by 7 per cent this year, with more than pound;260 million allocated by LEAs - up nearly pound;20m on last year.
SPECIAL NEEDS FACTFILE
* One in four children will have some special or additional needs.
* Around a quarter of all new statements in Wales in 2004 were for children under five.
* The proportion of pupils awarded statements ranged from 1.6 to 5.1 per cent in the 22 Welsh LEAs.
* Around pound;260 million is provided annually for additional learning needs in Wales.
* Special educational needs co-ordinators, who gave evidence to the Assembly's education committee, said more special needs training for mainstream teachers was vital.