Ministers are coming under increasing pressure to do more to improve mental health services.
The report examined services in London
A report by the health think tank The King's Fund says services in London are failing and more needs to be done.
It comes just days after another report warned many trusts across the country are struggling to maintain services because of a lack of money.
The Department of Health insists progress is being made and NHS services are improving.
The King's Fund report follows an 18-month inquiry into services in the capital. The think tank last carried out an inquiry into mental health services in London in 1997.
The report, called London's State of Mind, found that the number of low and medium secure beds for patients who need to be in hospital has doubled over the past six years.
However, it also reveals that beds are almost always completely full. In addition, the number of people being sectioned remains very high.
The report says that this combined with severe staff shortages in some areas means trusts are failing to cope.
But it also says that much of the £700m earmarked by ministers to improve services has failed to reach frontline staff.
It adds that while NHS spending has increased 28% since 1997, spending on mental health services in London has risen by just 14%.
The report's authors called for a new London-wide mental health strategy and tighter controls on spending to ensure the money goes where it is supposed to.
"We don't want to paint an entirely gloomy picture of mental health care in London," said Janice Robinson, one of the authors.
"There are many excellent services out there. But it's clear that progress just isn't fast enough and many of the problems and challenges identified in our 1997 inquiry persist, despite efforts to address them."
The King's Fund will host a conference on Tuesday to discuss the report's findings and possible solutions to the problems it has identified.
"No one organisation can hope to address the complex issues raised by our inquiry," said
Rabbi Julia Neuberger, chief executive of the King's Fund.
"We hope to bring together a range of organisations to help build capacity in mental health services.
"With them, we aim to find sustainable solutions to the problems faced by managers and staff as well as service users."
Last week's report from the Sainsbury Centre for Mental Health said mental health services were not receiving their fair share of money.
Ministers published a National Service Framework for Mental Health four years ago pledging to modernise care.
Health Minister Rosie Winterton welcomed the report.
"The King's Fund's Mental Health Inquiry 2003 is a valuable contribution to our aim of keeping mental health high on the national health agenda.
"Many of the areas raised by the report are already being taken forward," she said.
Ms Winterton said an extra £262m was spent on modernising mental health services this year. She said work was underway to see if this money was reaching the frontline.
"We are specifically examining financial pressures on local services as part of the most detailed assessment of mental health spending that has been conducted.
"The findings will be fed into plans for service developments that aim to strengthen community care and take the pressure off beds."
Liberal Democrat London spokesman Simon Hughes said: "Patients who do need to be in hospital must not face a neglected service suffering from more and more budget cuts and staff shortages."
Marjorie Wallace, chief executive of the mental health charity SANE, said: "There is no excuse for the state of psychiatric wards in London, which are squalid, overcrowded, rife with street drugs and aggression and where staff work under intolerable pressures.
"In 1998 we were promised safe, sound and supportive mental health services. Instead we have units which, far from providing safe refuge, are places of fear and intimidation.
"SANE calls on the government to make good its broken promises, provide urgent new investment to improve conditions on acute wards, and give an explanation of why the new monies have not made their way to front line care."
Paul Farmer of mental health charity Rethink added: "More resources are urgently needed so that all of London's mental health services provide care and treatment in a safe, sound and, when needed, secure environment."