If sanctions are maintained, the report says, they could in fact be counterproductive.
The three "wise men" appointed by the European Union have called for sanctions against Austria to be lifted.
In a report presented this evening to the French President Jacques Chirac, who holds the rotating presidency of the EU, the experts concluded that continuing sanctions would be counterproductive.
A freeze on bilateral diplomatic relations with Austria was introduced by all its 14 partners in the EU, after the right-wing Freedom Party joined the ruling coalition in February.
The EU's response is not expected before next week.
Report leaked
France has published the 43-page report on the internet, but its conclusions had already been leaked to a Spanish newspaper.
If sanctions are maintained, the report says, they could in fact be counterproductive.
According to the report, the measures have already created nationalist sentiments in Austria because they were mistakenly interpreted as sanctions against ordinary citizens.
Clean bill of health
The three experts - led by the former Finnish president Martti Ahtisaari - conducted dozens of interviews since they were appointed last July and gave Austria a clean bill of health regarding its treatment of refugees and immigrants.
Its record was similar to that of other EU member states, and in the case of ethnic minorities, better than most.
But they also described the Freedom Party as a right-wing populist party with extremist elements, which had promoted openly anti-foreigner language during the last election campaign.
The report seems to show Austria's EU partners the way out after the unprecedented introduction of diplomatic sanctions last February.
While having little impact on business and tourism, they threatened to block EU reforms and delay the entry of new members from eastern Europe.
Denmark and Finland, wary of outside interference in the affairs of small countries, have already called for an end to Vienna's diplomatic isolation.
EU divisions
But Belgium and France, which also fear electoral gains by right-wing parties, will be harder to convince, especially since Joerg Haider, who led the Freedom Party until last May, called the French president a pocket Napoleon and described the Belgian government as corrupt.
French diplomats said that a reponse was unlikely before early next week, and that the issue would be dealt with calmly, in consultation with their EU partners.
But even if the EU leaders decide to lift the sanctions against Austria, they will need to consider - as the report recommends - more effective ways to deal with the rise of extremism.