Disadvantaged children have fewer opportunities to improve themselves partly because education policies embed social divisions, says the report.
The Government's mantra of school choice is called into question by the findings of the Paris-based Organisation for Economic Co- operation and Development's policy paper No More Failures, to be published next month.
It said that better-off parents shrewdly exploit choice. It backed policies such as admissions lotteries for popular schools, used in Brighton and Hove, saying they foster equality.
Ed Balls, the Secretary for Children, Schools and Families, has said he prefers setting, in which children are grouped according to their attainment in individual subjects. David Cameron, Conservative leader, has called for a grammar stream in every school.
"Early tracking and streaming need to be justified in terms of proven benefits as they very often pose risks to equity," the OECD said. If tracking and streaming were used when children were older, the effects were not as marked, it said.
The OECD's paper coincides with a report from the centre-left think-tank IPPR that recommends free school meals during the holidays for children from socially deprived backgrounds to keep them away from the cheap, unhealthy food that causes obesity.
John Bangs, head of education for the National Union of Teachers, said the OECD report confirmed that early streaming damaged some children's ability to get the best out of life.
The Working with Others programme, based at the University of Brighton, works with schools to group children with mixed abilities in classrooms. Programme director Dr Cathy Ota said the feedback showed it had a positive impact.
But a spokesman for the Department for Children, Schools and Families said the Government is committed to setting and grouping by ability, not to streaming, which assumes children have the same level of attainment in all subjects.