A report into allegations of anti-Semitism in Labour found the party was “responsible for unlawful acts of harassment and discrimination”.
The Equality and Human Rights Commission identified “serious failings” in the party leadership’s attempts to tackle anti-Jewish racism.
The Jewish Labour Movement said the party “cannot hide from the tough decisions needed to put this right”.
Labour now has to publish an action plan within six weeks.
The party was plagued by accusations of anti-Semitism from 2016, during the leadership of Jeremy Corbyn.
Responding to the report, Mr Corbyn said he was “always determined to eliminate all forms of racism” and “regretted it took longer to deliver that change than it should”.
But he claimed his team had “acted to speed up, not hinder the process” and that the scale of anti-Semitism in the party had been “dramatically overstated for political reasons”.
Mr Corbyn was replaced by Sir Keir Starmer in April, who said tackling anti-Semitism within the party was his “priority”.
The EHRC launched its investigation in May last year after receiving a number of complaints from organisations and individuals, including the Jewish Labour Movement.
In its report, the watchdog found the party responsible for three breaches of the Equality Act, namely:
In a statement, it said: “The equality body’s analysis points to a culture within the party which, at best, did not do enough to prevent anti-Semitism and, at worst, could be seen to accept it.”
The Jewish Labour Movement said the failures by the party’s leadership had “toxic effects” on Jewish members and the community.
A spokesman added: “The blame for this sordid, disgraceful chapter in the Labour Party’s history lies firmly with those who held positions of leadership – those who possessed both power and influence to prevent the growth of anti-Jewish racism, but failed to act.
“Never before in our collective history has the Labour Party so fundamentally strained the ties that have bound the Jewish community to the British Left.”
The investigation found evidence of 23 instances of “inappropriate involvement” by Mr Corbyn’s office, included staff influencing decisions on suspensions or whether to investigate a claim.
Some decisions, said the watchdog, were made because of “likely press interest rather than any formal criteria”, and the party “adopted a practice of political interference”.
The EHRC said the party’s complaints process was inconsistent and lacking in transparency”, with the email inbox “largely left unmonitored for a number of years” and “no action taken on the majority of complaints forwarded to it”.
The watchdog said there had been recent improvements to the procedures, but the system was still “under-resourced and those responsible for it are not trained to the necessary standard”.
The report also said the party was responsible for two cases of unlawful harassment, where anti-Semitic tropes were used and complaints were branded fake or smears.
It named former Mayor of London, Ken Livingstone, and a local councillor, Pam Bromley, but said these were “only the tip of the iceberg”, and a further 18 borderline cases were found.
Mr Livingstone later released a statement, he was “deeply hurt” by the accusations and “fully rejects” them, calling himself a “life-long anti-racist”.
The EHRC said the party had proved it could “act decisively” when it came to sexual harassment, so anti-Semitism “could have been tackled more effectively”.
It called on Labour to “instil a culture that encourages members to challenge inappropriate behaviour and to report anti-Semitism complaints”.