There has been a drop in the proportion of childcare settings in England judged to be good or outstanding, Ofsted says.
There were 500,000 children cared for in the settings Ofsted visited
Inspectors said 57% of 27,200 settings inspected in 2006-07 fell into these categories for overall care - a drop of four percentage points on 2005-06.
The education watchdog labelled 4% of childminders, nurseries and crèches as "inadequate", with weaknesses such as a lack of activities or staff training.
Ofsted chief Christine Gilbert promised further monitoring of childcare.
The report, Getting on Well: Enjoying, Achieving and Contributing, was based on inspections of childcare settings, including nurseries and individual childminders, between April 2006 and March 2007.
The Ofsted report follows a study from Durham University suggesting government initiatives in early years have done nothing to improve the educational standards of those entering primary school.
Ofsted said of the estimated 500,000 children cared for in the settings inspected this year, 285,000 were receiving "good" or "outstanding" care.
Source: Ofsted inspections for childminders, nurseries, crèches
Childcare was rated as "satisfactory" or better in 96% of settings.
Some 3% of childminders were rated inadequate for overall care compared to 4% of day-care settings, such as nurseries. About one in 12 crèches were judged "inadequate".
And childcare provision in 7% of extended schools - which run after-school clubs and childcare - was also rated "inadequate", despite a major drive from the government to expand this sector.
Ofsted declined to say how many individual children were being cared for in inadequate settings.
The report shows that inspectors returned to almost 300 providers previously judged inadequate in providing government-funded early education.
Insufficient range of toys and activities, so that children wander aimlessly
Adults with lack of knowledge of how to guide children's learning
Lack of regular observation
Lack of opportunities to engage children's interest
Upon re-inspection 85% of these had improved, but 44 providers (15%) remained inadequate.
Despite the fall in the overall proportion of providers assessed as "good" or "outstanding", Ofsted says that this did not mean fewer individual children were receiving good or better care.
This is because a childminder looking after one child and a nursery with many places are both counted as a single "setting" - and an improvement in nurseries has been outweighed by a fall in good and outstanding childminders.
Chief Inspector Christine Gilbert said it was good news that so many childcare providers were maintaining a high standard.
"Research shows that there is a direct connection between high-quality early years provision and better intellectual, social and behavioural development," she said.
There had been many improvements across the sector but inspectors would continue to monitor providers and take action where necessary, she said.
Children's Minister Beverley Hughes said: "Only 4% of childcare settings were found to be inadequate - a very small proportion.
"Where settings are judged to be inadequate, Ofsted will work with providers to help them to improve, but will also take the necessary action to ensure the best results for children."
The Conservatives' family spokeswoman, Maria Miller, said: "It is deeply concerning that thousands of children are being cared for in inadequate childcare settings."