There is an "alarming" shortfall in UK diplomatic staff fluent in Arabic or Russian, MPs say.
The Commons Foreign Affairs Committee said the most "striking" deficiencies were in languages used in unstable parts of the world.
Further spending cuts to the Foreign and Commonwealth Office (FCO) could be "disastrous and costly", they added.
The FCO said there was a "renewed focus on languages as a diplomatic skill" despite cost-saving measures.
According to the committee, the department had been dealt a "tough hand" with its funding since the 2010 spending review, adding that ministers and officials had "on the whole, played it skilfully".
But it warned it was "struggling to fill positions in critical business areas".
"It is alarming that the strongest criticisms that we have heard about the FCO's capacity to gain local knowledge, and the most striking evidence of a shortfall in proficiency in foreign languages, relate to regions where there is particular instability and where there is the greatest need for FCO expertise in order to inform policy-making," the MPs said.
Witnesses had told the committee of a "shortfall in proficiency in Arabic" and that too many positions in the Middle East and North Africa were occupied by non-Arabic speakers.
It also echoed a recent warning from the Lords European Union Committee that Russian was a "weak spot".
The committee chairman Sir Richard Ottaway said that, despite a relatively small budget, the Foreign Office makes a "disproportionate contribution to policy-making at the highest level".
He warned: "Impairing the FCO's analytical capacity for the sake of a few million pounds could be disastrous and costly."
A Foreign Office spokesman said "tough decisions" had been taken as part of the government's deficit reduction plans, but that a new language centre had been opened in 2013 to strengthen training in "key languages including Arabic and Russian".
"All heads of mission in Arab countries speak the language that's used to do business in that country. 76% speak Arabic and the other 24% speak another local language," he added.
"We would not send an ambassador to a country without the appropriate language skills if they could not effectively conduct business on behalf of the British government."
The report into the department's performance and finances in the 2013-14 financial year also took a critical look at the tradition of using private sponsors to support events at embassies around the world.
It said events to celebrate the Queen's birthday had proved particularly lucrative. But the amount of money generated - £271,500 over the year - "hardly justifies the reputational risk to the department".
The MPs said the department should get better value for money by "extracting more" from commercial sponsors as long as it was transparent and the details published.