Giving parents more choice about their children's school has led to the development of racially segregated schools in some cities, MPs have said.
Schools provide an opportunity for different cultures to mix, the report says
A parliamentary report by a committee of MPs has warned the growth of faith schools could make the divide that exists between racial groups worse.
Children were sent to schools with the same racial background because of cultural "ignorance and fear", it said.
The inquiry was prompted by race riots in the north of England in 2001.
The Labour dominated Office of the Deputy Prime Minister select committee said no more faith schools should be given government approval unless they gave a commitment to promoting a multi-cultural agenda.
In the past the schools have been supported by Tony Blair.
The report, called Social Cohesion, said the divide between religious groups in Britain may also deepen, as has been the case in Northern Ireland.
"These choices can increase segregation unless the choices are well-informed and different cultural groups are encouraged and enabled to mix," warned the committee.
The MPs have called on Deputy Prime Minister John Prescott to take action, by ensuring that social housing policies do not lead to single race estates.
Schools, hospitals and leisure centres should not be located in an area that is likely to be frequented by one community, they said.
The report said greater care should be taken to ensure that regeneration programmes do not fuel resentment by appearing to benefit only one racial group.
Committee chairman Andrew Bennett said that evidence to the inquiry had shown there were economic and cultural benefits to living in a multi-cultural area.
However, he said there were "still concerns that some communities are turning in on themselves and trying to create mono-cultural areas."
The inquiry was told about one school in Oldham - where there were riots three years ago - which was 100% Bangladeshi and another that had only one white pupil.
And one head teacher described the decision by white parents not to send their children to his school as "white flight".
White families had moved away from an area to avoid sending their children to a school with a majority of Asian pupils.
The report said: "Schools provide an opportunity for different cultural groups to mix. There are many schools whose students do not reflect the range of cultural groups in their locality and so do not help to promote social cohesion.
"This is a result of parental choice, the quality of some schools and the growth of faith schools."
The committee recommended that local education authorities should adopt "new techniques" to persuade parents of the benefits of a multi-cultural education.
Guidelines issued by the Department for Education on admission policies and curriculum guidance to faith schools should also be revised.