The inspectors' findings on the secondary department of Iqra Academy in Glasgow are being passed to the registrar of independent schools who has power to decide whether it should be approved for registration or not.
Ministers can close a school down if it operates without approval.
Primary provision at the school, which offers Islamic studies as well as elements of a Scottish curriculum, was provisionally registered when it opened in August 1999 and this was continued after an HMI visit last year.
The inspectorate issued one of its bluntest summaries ever which read:
"Overall, the secondary and boarding education provided by Iqra Academy was unsatisfactory. The welfare of the school's pupils was not being suitably safeguarded. The learning and teaching provided was of a very poor quality.
The ethos was unsatisfactory. The school was not meeting its stated aims.
Management was unsatisfactory."
The school's only strength was said to be the "good" quality of its accommodation in a former secondary school - although there was no separation between boys' living and teaching spaces, the overnight supervisor slept on a mattress on the floor of the office and care staff shared the boys' toilets.
Most girls who were interviewed did not enjoy being at school - "they had been bullied and none thought that they had been treated fairly . . . Boys reported inappropriate sanctions and some instances of corporal punishment."
Inspectors were so concerned that child protection policies may have been infringed that they passed the allegations to the authorities.
The report includes 13 action points, including a recommendation that boarding provision should be closed if more trained and experienced staff are not employed.
The education of girls at the school, which prides itself on taking a traditional approach to education, also required to be improved as well as their relationships with staff. Girls were "very unhappy and stated that the staff did not listen to them and that they had no appropriate avenues for their complaints to be heard".
Of six teachers for the secular curriculum, only three held a teaching qualification. The curriculum did not not offer the same opportunities to both sexes - ICT and religious studies had been introduced for boys in S3 and S4, for example, but not for girls.
A reply from Iqra Academy stated: "We are seriously concerned about the issues raised in the report and we will immediately implement points of action outlined in the report."
The school pointed out that this was the first year of the secondary department and said that it was "fully committed to complying with government regulations with regard to all areas of education provision in Scotland".