Unemployment has risen steadily this year
Unemployed young people could suffer from "permanent psychological scars" due to being out of work, according to a survey by the Prince's Trust.
A YouGov poll of more than 2,000 people aged between 16 and 25 showed one in 10 of those who had been out of work had turned to drugs or alcohol abuse.
And those not in education or training were twice as likely to feel down, depressed, isolated or rejected.
Latest figures show almost a million 16-25s are unemployed.
The Prince's Trust provides loans to young people to help them back into work and is calling on the government and businesses to do more to help the younger generation escape unemployment.
Professor David Blanchflower, who was involved in the research, told the BBC that the government needs to help these young people as soon as possible.
"You need to get these folks into the labour market, and give them experience, because we know that in May, June and July the class of 2010 are coming out. We need to take this as a national crisis because it's going to flood us again later in the year," he said.
The Prince's Trust has launched a new campaign to raise £1m a week to support unemployed and disadvantaged young people.
The trust said its survey showed that 25% of unemployed young people believed their joblessness had caused arguments with their parents or other relatives, and 15% said their life lacked direction.
Martina Milburn, the charity's chief executive, said: "The emotional effects on young people are profound, long-term and can become irreversible. We must act now to prevent a lost generation of young people before it is too late."
She said young people "bore the brunt of the recession", which left "one in five 16 to 24-year-olds out of work".
"The result is a generation of undiscovered skills and talents. We must invest in these young people, rebuilding their self-esteem, to ensure that today's unemployed do not become tomorrow's unemployable," she added.