Gillian Shephard, the Secretary of State for Education, said the report on the London boroughs of Islington, Southwark and Tower Hamlets showed that teachers were committed to teaching reading by methods that were clearly not working.
She announced plans for performance league tables for teacher training colleges and to give inspectors powers to carry out their own tests in poor schools.
Inspectors from the Office for Standards in Education and the three authorities tested six- and seven-year-olds and 10- and 11-year-olds in 45 schools, all with higher than average numbers of pupils from poor backgrounds. About 80 per cent of seven-year-olds and four out of ten 11-year-olds had reading ages below their chronological age. Teaching was weak in about one-third of lessons.
Black African pupils performed best and disadvantaged white pupils worst.
In one in three schools the headteachers failed to ensure that reading was well taught. The report says: "The wide gulf in pupils' performance is . . . unacceptable. Some schools and pupils are doing well against the odds while others in similar circumstances are not."
Teacher training, inspectors say, is partly to blame. "On the evidence of what is happening in these three authorities, the message for the initial and in-service training of teachers is very clear: primary teachers must be taught to teach reading far more effectively."
Nigel de Gruchy, general secretary of the National Association of Schoolmasters Union of Women Teachers, said: "All the blame is being placed on trendy teachers. Yet the report itself identifies other contributing factors. These include English not being the first language; high levels of social disadvantage; poor management; poor initial training; lack of in-service training."
The three Labour-controlled authorities have accused Chris Woodhead, the Chief Inspector of Schools, of altering the report for political reasons.
Mr Woodhead said: "If it is political to want to do something towards raising educational standards in inner-city schools. Then so be it. I plead guilty."
Sir Claus Moser's education blueprint for Labour, page 15
How do children learn to read?
Phonics involves children learning to sound out words so that they understand how they are made up. Children copy their teacher in sounding out individual letters. They may also be taught to sound out the constituent parts of words.
Dismissed by many in the Eighties as old-fashioned, phonics has recently been restored to favour after research showed that children's sensitivity to sounds was a crucial factor in helping them learn to read. Studies also show that young children who know a large number of nursery rhymes, who can hear that "cat" is made up of "c" and "at" are the first children to learn to read.
The "look-and-say" method is also used by teachers; children repeat words without breaking them down. Pupils are required to memorise the shape of words and teachers may hold up flashcards containing a single word to help them do so.
The "real-books" approach is based on the idea that children will pick up reading by being offered mainstream story and picture books.
It was introduced as an alternative to reading schemes - books written as teaching aids - which teachers argued often had boring stories. The aim of "real books" was to promote excitement and interest.
Most teachers say they favour a mixture of methods. The report suggests that some teachers are too haphazard in their use of them and that teachers need to have a systematic strategy for teaching reading of which phonics is a carefully planned part.