Mr Straw's response to the report follows Tony Blair's promise during Prime Minister's Questions of a "fundamental shift in the way British society deals with racism".

"The publication of today's report on the killing of Stephen Lawrence is a very important day in the history of our country," Mr Blair said.

"It will certainly lead to new laws but more than that it will bring a new era of race relations."

Stephen's parents, Doreen and Neville Lawrence, watched from the gallery as the prime minister praised their dignity.

He added: "This is about the whole of British society, the public services within it and what we all must do to make sure these appalling events lead to a change in race relations within our society."

Conservative leader William Hague said everyone should share "shame and disgust" that Stephen's murderers have not been brought to justice.

But he added: "To condemn every police office in this country as racist would itself be prejudiced and wrong."

The BBC's Peter Hunt: The report may lead to a major upheaval in race relations in the UK

Stephen, 18, was fatally stabbed by white youths at a bus stop in south-east London in 1993. Nobody has been convicted of the murder.

The report backs his family's insistence that "institutional racism" and police incompetence wrecked chances of securing justice in the case.

The inquiry, headed by Sir William Macpherson, heard that Metropolitan Police officers had not followed up leads. A senior officer even revealed he had not fully understood the grounds for an arrest.

Stephen Lawrence: Nobody has been convicted of his murder

An internal Met inquiry into its handling of the crime than concluded that there was no grounds for concern.

But the home secretary is expected to resist the demand for the Metropolitan Police Chief Commissioner Sir Paul Condon to quit unless he accepts his force suffers from "institutional racism".

Leaks from the report suggest it defines the term as "the collective failure of an organisation to provide an appropriate and professional service to people because of their colour, culture or ethnic origin".

Sir Paul may be able to accept this definition as it does not suggest an inherent and structural discrimination.

Mr Straw is expected to say that Sir Paul has led the drive to stop racism in the police and should stay in his job until the end of his contract in January 2000.

Assisant Commissioner Denis O'Connor: "A new standard in looking at racism"

In its official response to the inquiry, the Police Federation, which represents rank-and-file officers, acknowledges that "institutional racism" exists but says members are "bewildered" at being blamed for a problem which is found across society.

Assistant Commissioner Denis O'Connor has called the effect of the case an "unfinished revolution in human rights".

Five suspects appeared before the inquiry but said little

He said: "This is a moment when we have a big change. It will require a new mindset."

"There is huge willingness and momentum to grasp these issue and move on."

But he backed the view that Sir Paul should not be forced out because of the criticisms.

"He bears the scars - he has launched an unparalleled programme of change. We'd lose momentum if we lost the commissioner."