Keeping asylum seekers in detention could lead to despair and suicidal urges, mental health experts have said.
Asylum seekers can be detained at any time during an application
They say the UK government should reverse the trend towards keeping asylum seekers in detention centres, whose capacity has trebled since 1997.
The Home Office promised to study the report, but said detainees had access to medical and psychiatric help.
The report by psychiatrists from Oxford University and Australia is published in the British Medical Journal.
Over seven million of the world's 17 million refugees remained "warehoused" under conditions of confinement, Mina Fazel, an Oxford University lecturer in child and adolescent psychiatry, and Derrick Silove, of the University of New South Wales in Australia, wrote in the BMJ article.
In the UK, detention is not mandatory, but asylum seekers can be held at any time during their application to stay and the centres are also used prior to removal when a bid is turned down.
But the report said that medical observations in Britain supported evidence from Australia - which abolished mandatory detention for families and children last year - that those held for long periods suffered from profound hopelessness, despair and suicidal urges.
Housing asylum seekers in the community was a better alternative, it said.
Ms Fazel said: "Media claims that Britain faces a deluge of asylum seekers serve only to increase the risk that 'tough', but ultimately damaging, measures will be implemented.
"The lessons for Britain are clear. There is ample evidence that models of community accommodation for asylum seekers lead to better mental health outcomes and that humane but rigorous forms of monitoring can still be instituted in these settings."
The report comes after human rights group Amnesty International last year said 25,000 asylum seekers had been held in detention centres during 2004.
It said many of these were vulnerable, such as pregnant women, families with children and torture victims, and that some were kept in the centres for up to two years.
A Home Office spokeswoman said officials would review the article, but added detainees had access to local medical facilities and psychiatric professionals.
"People with mental health problems would not be placed in detention in the first place, and health professionals monitoring them are required to report any problems.
"We are confident the system in place to care for detainees is satisfactory."