Grandparents often provide stability to a child, the report says
Grandparents in low-income families are risking financial hardship by giving up work to help look after grandchildren, according to charity Grandparents Plus.
Research it undertook with the Equality and Human Rights Commission suggests a third of families - and half of all single parents - rely on grandparents.
This contribution should be recognised financially by the state, it concludes.
Those caring for grandchildren aged under 12 are to get national insurance credits towards their state pension.
The measure, introduced in the 2009 budget, will apply to those who care for grandchildren for more than 20 hours a week from April 2011.
Grandparents Plus argues that government policy has conflicting goals in that it encourages both lone parents and people who are nearing retirement to work - resulting in a childcare gap.
Those in the poorest families are coming under increasing pressure to look after grandchildren, with working class grandmothers who are yet to retire the most likely to be providing free care.
Seven million grandparents are under 65 and many are called upon to be a "force of stability" in children's lives, the report said.
Many were likely to have had to give up work or reduce their hours, affecting their household income, pension rights and even their health, it went on.
It calls on the government to find a balance between supporting employment through additional childcare places and flexible working and providing adequate financial and practical support for carers.
Kay Carberry, commissioner at the Equality and Human Rights Commission, said: "Without the free childcare they give, many parents would not be able to work."
Sam Smethers, chief executive of Grandparents Plus, said: "It's time the government recognised that grandparents provide the last line of defence between millions of children and that poverty line."
The report said more than half of families with a disabled child live in poverty or are in danger of sinking into it, with grandparents providing emotional, practical and financial support.
Sam Smethers from Grandparents Plus says many grandparents face financial hardship
It also found that ethnic minority households were most likely to have three generations living under the same roof, which it said often led to the expectation that grandparents would take on care.
Benefits Minister Helen Goodman said lone parents were expected to do more to prepare for work because that was the best route out of poverty.
"However, we've made it very clear that we only expect parents to do this during school hours or during the hours they are entitled to free childcare.
"We absolutely do not expect grandparents to subsidise this work.
"We know that grandparents play a very important role in many families' lives.
"That's why... grandparents who are caring for a child while their parents are at work will be credited with National Insurance Credits towards their basic state pension."