More children than previously thought cannot write their names or recognise words like "dog" and "hat" by the age of five, according to new figures.
Nearly a third of children were unable to read 20 common words
The number showing expected levels of physical and emotional development had also fallen, assessments suggested.
Half a million children in England were assessed after a year of school.
The Department for Education and Skills said more rigorous and accurate marking this year was likely to have caused the drop in results.
The report based on the results stressed that measures had been taken to improve the way children were assessed.
The assessments by teachers - known as the Foundation Stage Profile - aim to show how children are developing against a set of expectations for the skills five-year-olds should have.
Results for 2006 showed a decrease in each of the 13 areas of development on which children were assessed.
Nearly a third were unable to read 20 common words, while 17% of the children were still at the basic stage of writing and could not write their own name or other words from memory - an increase from 15% last year.
Some 39% could not hear and say short vowel sounds within words such as "pen", "hat" and "dog".
And nearly one in three five-year-olds were not yet beginning to use the vocabulary involved in adding and subtracting, for example "add", "take away" and "how many".
Children's Minister Beverley Hughes said: "This apparent downshift is largely due to the effects of moderation rather than an actual fall in the achievement of young children at the end of the Foundation Stage (for three to five-year-olds).
"We will look at the data further to understand the underlying factors."