Mental Health tsar Professor Louis Appleby and his team from Manchester University's Department of Psychiatry, have called for urgent changes to improve mental health care.
Professor Appleby's team found that a quarter of mentally ill people who committed suicide and 10% of those who committed murder had recently been receiving treatment for mental health problems.
A staggering 15% of patients killed themselves in hospital - many by hanging.
The report "Safety First" from the National Confidential Inquiry into Suicide and Homicide by People with Mental Illness, is based on a detailed study of 5,582 suicides and 186 murders by psychiatric patients in the UK between 1996-2000.
Report findings
The report found that:
"These findings emphasise the challenge facing mental health services.
"Around 40% of patient suicides happen during or soon after in-patient care and we should make the prevention of these deaths a priority.
"The picture is different on homicide. Most perpetrators do not have the kind of illnesses that are easily treated."
"Safety First" makes 18 recommendations to protect both patients and the public including:
Dr Jenny Shaw, assistant director to the inquiry, said the report had highlighted a misconception about the risks to the general public from the mentally ill.
"The low figures for stranger homicides show that the risk to the general public from patients with mental illness has been greatly exaggerated.
"The public are more at risk from heavy drinkers."
Mental Health Charity Mind called for urgent government action.
Judy Clements, Mind's chief executive said: "People should be able to feel safe from harm in hospital and when they come out there must be adequate support in place from their local mental health team."
She said the report revealed the need for better risk assessments and targeted treatments for people with severe personality disorders and alcohol and drug dependencies.
Majorie Wallace, chief executive of the mental health charity SANE, said they want to see a community suicide watch to monitor people who have been released from hospital and to prevent further deaths.
She said: "Too many patients are suddenly catapulted into the community and left unsupported and often isolated.
"There is no excuse for the mental health services continuing to abandon people at the very time they are known to be at most risk."
Health Minister John Hutton said the findings of the report will be carefully studied and action was already in hand.
He said: "Work is already under way to address the issues raised in this report.
"Through the measures contained within both the NHS Plan and the Mental Health White Paper and through the ongoing work in the National Service Framework, we are making mental health services safer all round - for patients, those who work in mental health services, for patients' families and for the public."