Councils are failing in their duty to combat racism in schools, David Bell, the chief inspector of schools, has said.
A quarter of authorities are not doing enough to promote equal educational opportunities, the Office for Standards in Education found.
Involvement in race equality initiatives is often "sporadic and reactive with little strategic understanding of the importance of such work".
Common weaknesses include unclear guidance on schools' race equality policies and poor procedures for the reporting of racist incidents.
Mr Bell said: "I am very concerned by the findings. Ofsted takes this area of inspection very seriously and it's something we intend to look at more closely in the near future.
"The aim has to be to ensure that all children and young people, regardless of their ethnic group, are given the best opportunities to succeed in education."
A Brighton university study has found that Britain's education system is institutionally racist, with pupils and teachers vulnerable to abuse.
Trevor Phillips, chairman of the Commission for Racial Equality, said in December that the CRE will take schools to court if they fail to properly implement race equality plans.
Official figures show wide differences in academic achievement between ethnic groups.
Only 30 per cent of black Caribbeans gain five or more A*-C grade GCSEs.
This compares to 45 per cent of Bangladeshi, 51 per cent of white and 73 per cent of Chinese pupils.
Ofsted's findings are based on inspections of 36 LEAs during 2002-3.
Inspectors found large gaps between authorities who are succeeding in these areas and those who are not doing enough to tackle racial prejudice.
Kingston-upon-Thames in south-west London, is praised for instructing schools to monitor the curriculum to ensure that it reflects cultural diversity.
And Birmingham, inspected in 2001-2, is commended for developing curriculum material and for its clear and straightforward racist incident form which includes practical support on how to deal with such occurrences.
However, a study by the Birmingham advice service, published earlier this month, found that ethnic-minority pupils in the city are being held back by a racist curriculum.
Inspectors say good practice is not confined to urban areas. They cite Norfolk, Hertfordshire and Windsor and Maidenhead as beacons of good practice.
A two-year study examining how to promote racial harmony in schools and raise ethnic-minority achievement will be published by Ofsted next year.
Graham Lane, chair of the Local Government Association, whose own authority the London borough of Newham was judged unsatisfactory in tackling racism, said: "Authorities do need to raise their game.
"There are big issues about racism in schools that need to be tackled but schools also need to realise their statutory duties."
Last October, ministers launched a national strategy to raise the achievement of ethnic- minority pupils.
This includes a pilot programme to raise the achievement of black pupils in 30 secondary schools, a more robust inspection regime and regular publication of the exam results of different ethnic groups in each local authority.
Friday magazine 6 www.ofsted.gov.uk