The number of people in England being detained under the Mental Health Act has risen by 12% in the past five years, according to the NHS regulator.
The act was used over 50,000 times last year to detain patients in hospital - the highest ever recorded.
The Care Quality Commission also criticised the use of blanket bans on activities such as internet and phone use and access to outdoor space.
Inspectors found one or more such rule in place in three-quarters of wards.
The report said this "widespread use" was unacceptable.
It also criticised the practice - seen in some places - of putting patients in police custody when there were health facilities available when crises developed.
Inadequate staffing levels and poor access to GP care were also highlighted as problems in hospital.
Campaigners said the problems identified showed there was insufficient support available in the community to help care for patients.
Mind chief executive Paul Farmer said NHS bosses needed to "urgently" look at the situation.
"There are obvious pressures on the system, which are having a significant impact on the care of people who are at their most unwell," he said.
"Increasing bed shortages and staffing difficulties resulting from cuts to mental health services over two consecutive years mean people aren't getting the help they need.
"We are concerned at the evident lack of therapeutic activities available on some wards - it is essential that services focus on recovery rather than simply containing people who are in crisis," he added.
The CQC acknowledged this was a "nationally recognised problem".
CQC chief executive David Behan said the problems identified were concerning.
But he also said they had come across examples of good practice that others could learn from.
"We have seen great advances in treatment and care for people with mental health needs in recent years," he said.
"We have also met staff committed to reducing the restrictions placed on patients as far as possible."