Standards in nearly a third of schools in Wales are not good enough, says the schools inspection body Estyn.
Its report on every school and education provider over six years found improvement in schools was "slow".
The chief inspector, Ann Keane, said it was time to "face the facts" and "raise standards relative to other countries".
The Welsh Assembly Government said the report showed it was "making progress in most areas" and would examine it in detail before a further response.
Last month, assessments suggested Welsh children were lagging far behind the rest of the UK and much of the world.
Speaking after the publication of the Programme for International Student Assessment (Pisa) assessments, Education Minister Leighton Andrews said there was "systemic failure" in the school system and accused teachers of "complacency in the classrooms".
Mrs Keane said standards of literacy and numeracy were "not good enough".
She said 40% of children entering secondary school had a reading age below their chronological age.
"Teachers and leaders need more training in how they deliver literacy and numeracy, not just in English and Welsh lessons but across the whole curriculum," she said.
"That doesn't just mean that basic skills are not being taught well enough, but that we're not delivering in the higher order skills of literacy and numeracy either."
Mrs Keane said the assessment system was also "not good enough".
"We do not have robust comparable data on the literacy and numeracy levels of pupils because schools and authorities measure them in different ways," she said.
"This makes it difficult to identify gaps in basic skills and to plan support in a consistent way."
The report said that very few schools were "consistently outstanding".
Just 8% of schools achieved the top grade across all aspects of inspection.
However, standards of education and training had "significantly" improved in further education, work-based learning and early-years provision.
Mrs Keane called for local authorities "to do more to challenge under performance in schools".
"In most local authorities, officers did not work well enough with school governors and elected members to help them understand school performance," she said.
"Neither did local authority staff always target their efforts to improve the performance of those schools that needed most support even though many authorities had procedures to intervene.
"These procedures were not followed robustly enough to prevent some schools from falling into the category of 'school causing concern' when inspected by Estyn."
Around 4% of schools fell into this category, but the report says "30% of schools are not as good as they should be because of significant shortcomings in aspects of their provision".
Education Minister Leighton Andrews will make two keynote speeches in February, which are expected to include new proposals on school improvement.
The assembly government said: "We welcome Estyn's annual report which shows we are making progress in most areas. We acknowledge there's still work to do to raise standards and will now consider the report in detail before preparing our response."
Chris Keates, general secretary of the teaching union NASUWT said: "This report provides much needed balance to the ill-informed political hysteria that continues to surround Wales' ranking in the international Pisa results.
"It is encouraging that 70% of schools are achieving their targets.
"The remaining 30% face an uphill task unless the scandalous pupil funding gap between schools in England and Wales is closed.
"Teachers will be glad to see Estyn sharing best practice materials online as previous annual reports have tended to focus on identifying problems rather than offering solutions.
"These materials mark a welcome sea-change in the attitude of the Welsh inspectorate."
The Association of Teachers and Lecturers Cymru said the report gave a "candid assessment" of education.
Philip Dixon, director of ATL Cymru, said it showed there are "centres of excellence in Wales and that we do know how to run successful schools and colleges, but it also shows that the sharing of that experience of excellence is still too patchy".
"The report highlights the need for leadership at every level. This will be key if we are to make progress," he said.
"It is particularly disturbing to see the distance that some local authorities still need to travel if they are to provide schools with effective support."