The report says in one year over 160 young people were wrongly jailed
Children as young as 12 are being wrongly imprisoned in England and Wales, breaking government guidelines, says the charity Barnardo's.
Its report says that confusion over the criteria for youth courts led to more than 160 under-15s being wrongly given custodial sentences in 2007.
Barnardo's said locking up so many children was a "tragedy".
The Ministry of Justice said detention should be the last resort - but judges should have the final say.
But Lyn Costello of the charity Mothers Against Murder And Aggression said community punishments were a "waste of time" and young offenders were not being locked up long enough to ensure a change in behaviour.
The law specifically states that children aged 14 and under should not be locked up unless they have committed a grave offence or have committed a serious offence and are deemed to be a persistent offender.
But the Barnardo's report found more than a third of 12 to 14-year-olds locked up did not meet the conditions.
Barnardo's chief executive Martin Narey: "I've been shocked at the number of very young children we lock up"
Barnardo's surveyed around half of all children who were put in young offender institutions in 2007.
More than a fifth were locked up for breaching an Anti-social Behaviour Order or similar punishment, half were victims of abuse and more than a third were living with an adult criminal.
Barnardo's chief executive Martin Narey said that until 1998 it would have been illegal to imprison these young people unless they had committed one of the so-called "grave offences".
"Now we do this, every year, to more than 400 children aged 12, 13 and 14.
Casey, 18, learned to make a fast £700 selling drugs for a dealer on the street before she was even a teenager, and was first sent to a secure unit at 13.
I didn't have family so people on the streets were like my family.
I didn't want to commit crime.
I was 11 years old when I stopped living with my parents and I didn't see no other way to be able to look after myself.
It's easy to become institutionalised because you have someone looking after you, you have someone giving you your meals, you go to school and you are able to associate with people your own age group.
I am sorry for the things I done in the past.
However, there's things that was happening - you might see this face, but you don't know what goes on behind it.
As much as I hurt people, there was other things going on in my mind to make me act that way.
As told to the BBC's Nicola Stanbridge
"This is a tragedy for the young people themselves, it's a shocking waste of money and, in terms of reducing their offending and doing anything to protect victims, it is almost invariably ineffective.
"We are calling for stricter, clearer rules on sending children as young as 12 to custody so that practice can be brought into line with government policy."
Juliet Lyon, director of the Prison Reform Trust, said: "We know that sending children to prison is expensive and ineffective, with three-quarters reoffending within a year of release.
"Yet we still persist in sending thousands of our most vulnerable young people into corrosive youth custody every year. We need sentences that work, not those that lead children into more trouble."
Meanwhile, a committee of MPs has warned that custodial sentences are being used inconsistently.
The Commons justice committee said there was no "common understanding" of what was meant by "last resort" and warned of "regional variations" across England and Wales.
It said some young offenders were being locked up when there were not enough resources to provide community punishments, the committee said.
And it warned new guidelines for youth courts could mean children under 14 being locked up for three minor offences even if they have never appeared in court.
Committee chairman Sir Alan Beith told the BBC's Today programme young people in the UK did not commit more crime than people in other countries, but far more of them were locked up.
He added: "We know that custody does not work to reduce reoffending, and that it does not have a deterrent effect on young people, because their crimes are usually opportunistic and impulsive, so it is vital that effective alternatives are available."
However, Ms Costello said community sentences made little difference to many young offenders because "they don't take them seriously".
She added: "My problem is that these kids serve very short sentences and we don't have time to do anything with them.
"We need to help these young people so that they come out with different attitudes."
A spokesman for the Ministry of Justice said that in 97% of cases, young offenders did not receive custodial sentences.
He said: "In the most serious of cases, however, it is right that a custodial sentence is imposed.
"Once a custodial sentence has been served we believe it is vital that young people are given the chance to get back on the right path and make a positive contribution to their communities."
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