Secondary schools must put the learning of languages in a better light to encourage take-up by pupils, according to Estyn.
A report from the inspectorate, which was launched earlier this month at the annual conference of CILT Cymru, the language centre for Wales, revealed deep concern about the declining numbers studying modern foreign languages (MFL). But it stopped short of calling for them to be made compulsory.
Steffan James, an Estyn inspector and former language teacher, said language teaching was generally good in Wales, but pupils needed to understand the benefits of studying languages, especially given the many options they now have at 14.
"The trend in post-14 education is to move to greater choice, which may well lead to a further reduction in many traditional subjects, including languages," he said.
"I think it would be difficult to move back to compulsory MFL in secondaries, but compared with European countries we are not doing that well."
Just 28 per cent of 15-year-olds in Wales chose to take a language in 2007, compared with 46 per cent in England. But a greater proportion of pupils in Wales got good results, with over three-quarters of language GCSEs graded A* to C - better than in nearly all other subjects.
The report, which contains 13 recommendations, calls for at least two hours of language lessons a week at key stage 3 and for more collaboration between English, Welsh and MFL departments.
Mr James said all languages should be taught in a systematic way: "The technical terms should be similar in each language. Grammar has become a four-letter word in schools, but it is so important."
The report also calls for improved language options in vocational courses and for the language element of the Welsh baccalaureate to become a "worthwhile experience".
The results of an MFL consultation are due to be published by the Assembly government in December.