A panel of executives at the World Bank says its President Paul Wolfowitz broke bank rules in awarding a substantial pay rise to his girlfriend.
Paul Wolfowitz is mired in a scandal regarding payments to his girlfriend
The directors said the full board of the World Bank should consider whether Mr Wolfowitz was still able to provide effective leadership.
He is due to appear before the full 24-member board in Washington.
The board has the power to dismiss Mr Wolfowitz, reprimand him or report a lack of confidence in his leadership.
In remarks released ahead of the board meeting, the panel said Mr Wolfowitz provoked a "conflict of interest" at the World Bank.
It ruled he had broken the bank's code of conduct and violated the terms of his contract.
The full board must address the issue of Mr Wolfowitz's ability to continue in his job, the panel urged.
A spokesman for the US treasury secretary said the panel's findings did not merit Mr Wolfowitz's dismissal.
"[The board must consider] whether Mr Wolfowitz will be able to provide the leadership needed to ensure that the bank continues to operate to the fullest extent possible in achieving its mandate," the panel concluded.
The BBC's James Westhead, in Washington, says the signs do not look good for the World Bank head, with the tone of the panel's comments suggesting he will face at least some kind of censure.
Mr Wolfowitz has faced calls for him to step down since details emerged about his role in securing a pay rise for his partner, Shaha Riza, after he was appointed president of the World Bank in 2005.
When Mr Wolfowitz took over Ms Riza was transferred to work for the US state department, to avoid any conflict of interest.
But her salary rose quickly to about $193,000 (£98,000) - more than the $186,000 Secretary of State Condoleezza Rice receives before tax.
The World Bank has since been investigating the extent of Mr Wolfowitz's role in securing the pay increase.
Mr Wolfowitz has received the backing of senior figures in the US administration, including an endorsement by Vice-President Dick Cheney.
But he is less popular with European governments, which hold key positions on the board of the bank.
David Rifkin, a former justice department lawyer and friend of Mr Wolfowitz, told the BBC he found the panel's position inexplicable because Mr Wolfowitz had acted based on advice from the bank.
Many people viewed the row as an anti-American power play by European countries, he said.
"If this attempted coup against Mr Wolfowitz succeeds, it would poison US relations with Europe for quite some time to come," he warned.
"This is not an effort to oust him by people from regions in the developing world who supposedly may have not been happy about his anti-corruption efforts, they are all for him. It is about the Europeans and it is about in essence poking this administration in the eye."
Mr Wolfowitz was considered a controversial choice ever since President Bush nominated him to head the World Bank, because of his high-profile role during the early part of the Iraq war.