Mental health services are failing to spot patients who are homicidal or suicidal, a report warns.
25 mentally ill people a week take their own lives, a study reveals
The review found on average, one person a week dies at the hand of a mentally ill patient - almost a third of who had been rated as a low risk.
The government's mental health tsar also found nearly half the 1,300 mental health patients who commit suicide each year were seen by doctors beforehand.
Health Minister Rosie Winterton accepted the system had problems.
The report, published on Monday, was compiled by Professor Louis Appleby.
It revealed that 249 people have been killed by psychiatric patients released into the community over the last five years.
It also showed that 29% of patients who committed homicide had seen mental health services in the previous week.
One in six of the killings was blamed on the failure to ensure patients took their medications properly.
Mental health staff sometimes became "desensitised to the risks they are dealing with", the report said.
Researchers looked at all the killings and suicides involving mentally ill people over a five-year period.
On suicides, the report found 49% of those who killed themselves had been in contact with services in the previous week, and 19% in the previous 24 hours.
Yet immediate suicide risk was estimated by staff in England and Wales to be low or absent in 86% of cases.
Professor Appleby told the BBC it was often difficult for staff to establish which patients posed the biggest threat to society.
He said: "Staff are dealing with degrees of risk all the time and to some extent they become used to the fact that patients are carrying a degree of risk.
"Being able to spot from time to time when that risk is changing and beginning to escalate is more difficult than simply knowing there are risk factors around."
The report comes after an inquiry into the killing, in London's Richmond Park, of retired banker Denis Finnegan by paranoid schizophrenic John Barrett found significant failings in the risk-management process.
Call for new law
Ms Winterton she said a key issue was that the goverment could not force discharged patients to take medication.
She told BBC Radio 4's The World This Weekend: "What we need to do now is to make sure that the care that we can provide in the community is reflected in modern legislation.
"At the moment we have no power to be able to say we want people to comply with treatment."
Marjorie Wallace, chief executive of the mental health charity Sane, said one in three of the homicides committed by mentally ill people could be prevented.
She said: "It is not a question just of resources or laws but, as has been highlighted, the failure to identify people at risk when all the red alerts were in hindsight flashing.
"It seems that those making decisions about whether a patient would discharge himself from hospital, or be allowed to leave a ward, are so concerned to protect his civil liberties and short-term wishes that they are turning a collective blind eye to the risks a person may pose to themselves or occasionally others - and to their own long-term future."
The report says units need to be more secure to prevent patients from absconding.
Observation procedures on the ward also need to be strengthened to prevent suicides.
And when a patient is discharged, the transition from ward to the community needs to be smoother, it said.