It found that 65 per cent of school-age offenders were not attending lessons regularly. The majority - 42 per cent - had been excluded, while the other 23 per cent were playing truant a significant amount of the time.
Of the 100 interviewees on supervision orders, 60 per cent were not in work, training, or education. Truants and excluded pupils made up 23 per cent of the total, while 6 per cent were in pupil referral units and 36 per cent were unemployed.
"Reducing the number of pupils who are not at school for reasons of truancy or exclusion could significantly reduce the number of young offenders in a local area. Half of truants offend, but only a quarter of non-truants do," says the report.
Three-quarters of excluded pupils offended, whereas a third of young offenders were in school.
The report says there is no agreement on how to tackle truancy, although the Department for Education and Employment's Truancy and Disaffected Pupils Programme supported preventive work in primary schools and among younger secondary pupils, contacting the home of an absent child on the first day of non-attendance, and offering the opportunity for all pupils and staff to help draw up a policy on attendance.
Judy Renshaw, one of the Audit Commission authors of the report, said: "The police would not provide the right sort of information to tell if offending had been reduced. It seems such a waste of potential."
The report praises Peers School in Oxford, which has a special needs unit, a team of support teachers and a counsellor on site. It says that local authorities should ensure that the special educational needs of pupils had been considered before exclusion, and that the authorities should promote the reintegration of excluded pupils back into education. Researchers have, however, dropped a draft proposal that schools should be forced to take in excluded pupils from elsewhere to match the numbers they had themselves excluded. Mark Perfect, the report's co-author, said they had preferred to focus on good practice nationwide rather than untried theories.
The authors believe schools have a very important part to play in crime prevention. Mr Perfect said: "Socialising children is one very important aspect of it. We have to teach young people social ways to behave and give positive messages. We're not arguing that schools should be places where pupils are kept in detention."
They believe providing counselling for pupils on site would be popular and useful. "Having someone to talk to was top of the wish-list for many pupils. It was mentioned a lot," said Mr Perfect.
* Local authorities should consider targeting schemes to provide intensive, structured preschool education and home support for three and four year olds, in which parents are involved, in areas of high risk and deprivation and they should be evaluated * Schools should reinforce good behaviour, encouraging parental involvement.
* Child mental health services should offer support to schoolteachers dealing with pupils with behaviour problems, especially in high-risk areas.
* LEAs should encourage schools to develop strategies for attacking truancy, drawing on good practice promoted by the Department for Education and Employment and monitoring effects. The police and other services should monitor the impact on nuisance and offending by young people.
* LEAs should require schools to confirm that the special educational needs of excluded children have been considered.
* Social services could pilot the attachment of family support workers to schools in deprived areas, to help keep young people at risk in school.
* LEAs should promote the reintegration of excluded pupils into schools, perhaps commissioning independent agencies such as Cities in Schools to help.
* Youth services should consider focusing their work in areas of the highest deprivation.
The eldest of four children, father in prison, unemployed mother. Billy missing from home for long periods at age of five.
Poor achiever at school and truanted regularly until his permanent exclusion at 14.
Refuses youth training as crime is more profitable.
First came to notice of police at age of eight when involved in criminal damage: has now been in trouble on nine occasions for crimes including burglary and handling stolen goods.
Phil, 17 Parents separated when he was four. Lives with mother in a stormy relationship - he has recently attacked her with a knife. She has a history of being abused by men. Went into voluntary care at 10 but absconded back to his mother who wanted him but could not cope. Excluded from junior school, readmitted but became permanent truant.
Education ended at 13 when he was in care, moving between there and home.
Criminal career began at eight with car stealing and arson: currently accused of aggravated burglary.
Misspent Youth: Young People And Crime by Mark Perfect and Judy Renshaw, HMSO Pounds 20