Too much pressure on schools in England to get good GCSE grades led to over-generous marking of coursework by teachers, the exams watchdog concludes.
In its final report on the controversy over this summer's GCSE English exam, Ofqual says external examiners had to raise grade boundaries as a result.
It says pressure on schools to hit targets was to blame for the debacle.
Heads said it was "outrageous" to blame teachers for the fiasco which saw some pupils get lower grades than predicted.
Ofqual chief executive Glenys Stacey said: "We have been shocked by what we have found. Children have been let down - that won't do.
"It's clear that children are increasingly spending too much time jumping through hoops rather than learning the real skills they need in life - that won't do.
"Teachers feel under enormous pressure in English, more than in any other subject, and we have seen that too often, this is pushing them to the limit - that won't do either."
Speaking to BBC Radio Four's Today programme, Ms Stacey added she believed teachers had marked the test "optimistically", rather than with a deliberate intention to inflate grades.
She said: "Teachers are not making up marks here.
"They are doing their level best to do the best for their students and they are bound, given the pressures they are under, to take the most optimistic view.
"There's an amount of tolerance... some lee-way in the marking. But if enough teachers mark up to that tolerance, mark up to that limit, then overall it has a national effect," she added.
This summer's English GCSEs were a new modular qualification, with pupils sitting written exam papers and "controlled assessment" (coursework completed under strict classroom supervision) and schools decided when pupils submitted that assessment work and sat exams.
Ofqual's research found many schools used the marks pupils received in their first exams and the January grade boundaries to work out what score a pupil would need in their controlled assessment to get a certain grade and marked it accordingly.
Most of the controlled assessment work was submitted in the summer and examiners saw evidence of over-marking.
This led to exam boards raising grade boundaries, meaning some pupils got poorer grades than expected.
In Wales, ministers ordered a regrade for pupils who got a lower grade than expected with Welsh board WJEC, but Ofqual did not order such a move in England.
Ms Stacey said the distribution of this year's GCSE English results, which saw bunching around the C grade boundary, was "shocking".
"The unexpected pattern, the unprecedented clustering around perceived grade boundaries for each of the whole qualification is striking."
Schools in England are measured on the percentage of pupils who get five A*-C GCSEs, including English and maths.
This measure is included in league tables, with schools expected to have at least 40% of students reaching this standard.
In its report, Ofqual says: "The regulator concludes that so much weight on one grade in one subject as part of accountability and performance measures created perverse incentives for schools in the way they marked controlled assessment and led to the over-marking."
The report says the new qualifications "reinforced the trend" of schools running the GCSE schools years (Years 10 and 11) as a "tactical operation to secure certain grades and combinations of grades".
"This has come to be seen as 'what good schools do' despite the awareness of many teachers and parents that the concept of broad and deep learning can get lost along the way," it says.
Exams in 2013
Ofqual says it will take action to ensure there are no repeats of this year's problems in 2013.
Exam boards will have to tighten controlled assessments and will not be allowed to issue grades for exams and controlled assessments sat in January 2013.
This will mean teachers cannot look at grades from January results and mark controlled assessments, sat in June, to ensure a pupil's overall mark adds up to a given grade.
The watchdog says this year's debacle proves the proposal by Education Secretary Michael Gove to end the modularisation of GCSEs in England is correct.
Ms Stacey said the new modular English GCSEs at the heart of the fiasco were too flexible and "not sufficiently resilient" to take the pressure they were put under.
"It is so flexible that, when subjected to the pressure of the accountability system, it can buckle," she said.
Shadow schools minister Kevin Brennan said: "Pupils shouldn't be punished for this shambles.
"The government has the power to sort this out, as has already happened in Wales. Now pupils and teachers are being forced to go to the courts to seek justice - that is ridiculous."
Last week a group of head teachers and councils launched legal action against Ofqual and two exam boards over June's English GCSE exam.
It has served court papers on exam boards AQA and Edexcel, detailing the case for the exams to be regraded.
A total of 150 schools, 42 English councils and six professional bodies and 167 pupils are represented by the alliance.
Malcolm Trobe, deputy general secretary of the Association of School and College Leaders, said: "For Ofqual to suggest that teachers and schools are to blame is outrageous and flies in the face of the evidence.
"Ofqual is responsible for ensuring fairness and accuracy in the system. The fact remains that different standards were applied to the exams in June and January and this is blatantly wrong.
"The accountability measures do place tremendous pressure on teachers and schools, especially at GCSE grade C, but to say that teachers would compromise their integrity to the detriment of students is an insult."
Russell Hobby, general secretary of the National Association of Head Teachers said teachers should not be made scapegoats for the system.
"We urgently need to break this dysfunctional connection between assessment and accountability.
"If we do not, all future reforms to exams, such as the English Baccalaureate, will encounter exactly the same problem, and Michael Gove should heed this warning as he overhauls the system."
Andrew Hall, chief executive of the AQA exam board said: "I am acutely aware that the results this summer had a big impact on some schools and have left many students and teachers feeling very let down."