The 20-member commission - headed by former government minister Bernard Stasi - gave its report to President Jacques Chirac after three months of consultations with religious leaders, teachers, politicians and sociologists.
Chirac will now have to decide whether to follow the body's recommendations and propose a new law to limit what people can wear in state schools.
However, the report also suggested that Yom Kippur, the Jewish Day of Atonement, and Eid al-Fitr, the Muslim day marking the end of Ramadan, be celebrated in schools.
It also encouraged the establishment of a national school for Islamic studies, as well as the provision of alternative meals in public canteens for observant Muslims and Jews.
But "conspicuous" signs of religious observance - including headscarves worn today by several thousand schoolgirls in France, as well as Jewish kippas or Sikh turbans – are out, the report recommends.
Only “discreet” signs should be permissible, including small medals and crosses on necklaces.
A Sikh French MP, Simranjit Singh Mann, has voiced his concerns over a possible French law that would require them to cut their hair and remove their turbans.
Mann, currently in Paris as part of his month-long European and American tour, said he would raise the issue with Prime Minister Atal Bihari Vajpayee and France's ambassador to India.
Shiromani Akali Dal told journalists on Thursday he was appalled at French ignorance about the Sikh religion.
"The French and the Sikhs have known each other for over three centuries now. Yet, now the French seem to be totally ignorant of the Sikh culture. I am surprised and appalled at this."
Catholic student condemnation
One French student, Francoise Lamy, told Aljazeera.net the report’s conclusions were incredible.
“I’m a Catholic. If I choose to cover my hair, am I going to be breaking the law? Or would it not matter because I’m not wearing it for Islamic reasons? How can you police this?
“Don’t I have the freedom to wear whatever I like? If I see someone wearing a turban, does that mean I’m feeling pressured to become a Sikh. It’s just ridiculous,” Lamy added.
France's Catholic Church had already voiced its opposition to a new draft law banning hijab in state-run schools in November, saying it put the country's neutrality at risk, French media reports said.
Difficult Presidential decision
In an increasingly multi-ethnic society, where Islam is the second biggest religion in France with more than 6 million adherents - the controversy is greater than ever.
Natifa Bergeron was forbidden to go
on a school trip with her son for
In an open letter to President Jacques Chirac in this week's Elle magazine, signed by leading French feminists, some celebrities supported an outright ban.
"The Islamic veil sends us all - Muslims and non-Muslims - back to a discrimination against women which is intolerable," the letter said, signed by people such as actress Isabelle Adjani, writer Catherine Millet and clothes designer Sonia Rykiel.
The letter will support the views of some politicians and schoolteachers who claim certain clothing is being used as an aggressive symbol of religious identity.
Most of the ruling centre-right UMP party favours a ban on all "visible" symbols of religious identity in class.
The latest opinion polls also show 57% of the public endorses this line.
Chirac appeared to be in agreement last week: "The principle of secularism must be upheld and, in the case of teaching, one cannot accept ostentatious signs of proselytisation, whatever they are and whatever the religion might be."
However, Nicholas Sarkozy, interior minister, has come out against a new law, saying it risks creating more problems than it solves.
He posed the question as to whether the law should be applied to private religious schools as well - a move that could mean Catholic nuns are required to remove their habits before they can teach.