Correspondents say it is likely that they will accept the report's advice, but the Freedom Party's continued presence in the government will be an embarrassment for them.
Austrian Chancellor Wolfgang Schuessel and his deputy Susanne Riess-Passer of the far-Right Freedom Party called for EU states to end the sanctions as quickly as they were imposed.
A freeze on bilateral diplomatic relations with Austria was introduced by all its 14 EU partners when the Freedom Party joined the ruling coalition in February.
The report by the EU's independent advisers - known as the three "wise men" - concluded that maintaining sanctions could be counterproductive, serving to increase rather than reduce nationalist tensions in Austria.
Embarrassment
The EU states had hoped the sanctions would force the Freedom Party out of government.
Correspondents say it is likely that they will accept the report's advice, but the Freedom Party's continued presence in the government will be an embarrassment for them.
Mr Schuessel said he was grateful for the report by the panel of experts, headed by Finnish ex-president Martti Ahtisaari, which noted his country's commitment to common European values.
The panel's conclusions on the effect of sanctions on Austria were presented to the French President Jacques Chirac, who holds the rotating presidency of the EU.
The EU's response is not expected before next week.
The report noted that sanctions had already created nationalist sentiments in Austria because they were mistakenly interpreted as sanctions against ordinary citizens.
Xenophobic language
It 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, the report said.
But the "wise men" 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 accused the Freedom Party of using "xenophobic or even racist" language.
Joerg Haider, who led the Freedom Party until last May, told local television the report proved the party had been misunderstood.
"Those who thought they could stamp us with the hallmark of a fascist, terribly evil party did not succeed," he said.
EU divisions
Denmark and Finland, wary of outside interference in the affairs of small countries, have already called for an end to Vienna's diplomatic isolation.
But Belgium and France, which also fear electoral gains by right-wing parties, will be harder to convince, especially since called the French president a pocket Napoleon and described the Belgian government as corrupt.
Even if the EU leaders decide to lift the sanctions, they will need to consider - as the report recommends - more effective ways to deal with the rise of extremism.