Britain's political system is in danger of "meltdown" if major changes are not made, an independent report says.
Single-issue movements like Live 8 "harness real interest"
The Power Inquiry, chaired by Baroness Helena Kennedy, says voters feel they have little influence over decisions affecting their lives.
The inquiry's Power to the People report calls for a shift in control from ministers to parliament, and from central to local government.
State funding of political parties and a voting age of 16 are also suggested.
The report drew on 1,500 public submissions as well as surveys and hearings held in the UK during the 12-month inquiry, funded by the Joseph Rowntree Trust to mark its centenary.
It cites the low turnouts in the 2001 and 2005 general elections and falling membership of political parties as proof that "the current way of doing politics is killing politics".
"Politics and government are increasingly in the hands of privileged elites, as if democracy has run out of steam," Lady Kennedy said.
"Too often, citizens are being evicted from decision-making, rarely asked to get involved and rarely listened to."
As a result, people were turning away from voting and formal politics in favour of direct action and single-issue campaigns, the report says.
Within parliament, the powers of party whips should be restricted in favour of more involvement from cross-party select committees, the report suggests.
And it urges greater power for local councils to administer their own finances.
It argues that individual donations to political parties should be restricted to £10,000.
Power Inquiry: Key recommendations
Donations on political parties to be capped at £10,000
A "voter vouchers" system, where individuals indicate if they wish to allocate £3 of state funding to a particular party
Voters given the chance to put forward laws
The voting age, and the minimum age where people can stand for Parliament, to be reduced to 16
A 70%-elected House of Lords
Monthly logs to monitor ministerial contact with companies, lobbyists and pressure groups
Restrictions on the powers of party whips
In their place, individuals should be able to tick boxes on their ballot paper to give £3 of state funding to their favoured party, it says.
Age limits for both voting and standing for parliament to be reduced to 16, and a House of Lords to which 70% of members are elected, are also suggested.
Logs of ministerial meetings with lobbyists, pressure groups and businesses should be published for greater accountability, the report adds.
An inquiry spokesman said the recommendations were designed to tackle "the creeping threat of authoritarianism".
This could be achieved by "harnessing the kind of interest inspired by single-issue movements like the fox-hunting protests and Live8", he added.
Tony Blair's official spokesman said these were issues which were debated inside and outside parliament and the Power Inquiry "will contribute to the debate".
For the Conservatives, Oliver Heald, Shadow Constitutional Affairs secretary, welcomed the suggestion that some power needs to move from ministers to the House of Commons, and also the call for a substantially elected Upper Chamber(the House of Lords).
However he opposed the plan to drop the voting age to 16. He said: "No European country has a nationwide voting age below 18. Of the mere nine countries in the world that do, the likes of Iran, Sudan, Cuba and North Korea are hardly paragons of democracy.
"Lowering the voting age would do nothing to address the underlying problems of political disillusionment, and would just lead to young people abstaining from an even earlier age."
The Liberal Democrats' president, Simon Hughes MP, welcomed the report: "British Democracy is in crisis whatever the Government pretends. Most voters are ignored and most people feel they have no influence.
"The Liberal Democrats will continue to push for fairer parliamentary representation and greater Government accountability."
Nottingham University's Philip Cowley, told BBC Radio 4's Today that lowering the voting age to 16 was not the answer.
"When the Electoral Commission looked at this, they found no overwhelming support among young people for it if you poll them properly... they found 80% of the public didn't think 16 was the right age; they thought it was too low.
"So you've got a report here that's all about listening to the public, doing what the public want, and on this particular issue, where 80% of the public think 16 is too low an age, they simply are ignored."