The report obtained by Associated Press on Wednesday went on to say the EU might have to make a public denunciation of developments to distance itself from "the lack of transparency, and assumed rigging" of the vote.
"Ten days after the polling day, the situation is of political uncertainty and informational chaos regarding the results of the election," according to the confidential report.
"The National Electoral Board does not seem to be in control of the counting operation by the constituency electoral committees and limits itself to passively receive the reports from a limited number of constituencies."
The electoral board disagreed. "We have electoral officers in each constituency and they are responsible for that. We are in control," spokesman Getahun Amogne said.
While the report was confidential, the observers went public on Wednesday with fears that after voting and campaigning that had been unprecedentedly open, the whole election process was being undermined by delays in the vote count that were raising the risk of fraud.
Millions of Ethiopians voted in
the 15 May polls
Early results showed the opposition making strong gains - it had held just 12 seats in the departing 547-seat parliament - but a lead for the ruling party that has held power since ending a dictatorship in 1991.
So far, results from just 186 constituencies have been released, with 80 seats going to the opposition. Tension was high as the nation awaited comprehensive results and both opposition and ruling parties claimed victory.
"There is no legislation that stops parties from claiming they have won seats. The NEB will announce officially the results and they will remain final," Getahun said.
"There is no legislation that stops parties from claiming they have won seats. The NEB will announce officially the results and they will remain final"
spokesman for National Electoral Board (NEB)
"By the end of this day we expect to receive almost half of the results ... We are progressing very well."
The National Electoral Board had promised to release provisional results last Saturday, but only a handful of counts came in. It has been releasing new counts each day.
Carter undermined process
The EU report also said US President Jimmy Carter, who led a team of 50 election observers, undermined the electoral process and EU criticism with "his premature blessing of the elections and early positive assessment of the results".
Unless there is a "drastic reverse toward good democratic practice" the observer team and EU "will have to publicly denounce the situation".
"Otherwise, the EU jointly with ex-President Carter will be held largely responsible for the lack of transparency, and assumed rigging, of the elections."
The opposition has repeatedly accused the ruling party of fraud, though foreign monitors have said the elections were the most open in Ethiopia's history.
The opposition threatened to boycott parliament if the allegations of vote fraud were not properly investigated by a joint team that should include representatives of political parties, electoral authorities and international observers.
EU observers had said soon after ballots were cast that the vote was "the most genuinely competitive elections the country has experienced," despite some problems and human rights violations.
Prime Minister Meles Zenawi, known as one of the continent's more progressive leaders, has pledged that his sometimes authoritarian government would introduce greater democracy. Many saw the polls as a test of his commitment to reform.
Ethiopian PM Meles Zenawi has
pledged more reforms
Ethiopia was an absolute monarchy under Emperor Haile Selassie until the mid-1970s, when a brutal Marxist junta overthrew him.
Civil wars wracked the ethnically fractured country in the 1980s, and famine took as many as one million lives. Meles' rebel group overthrew the junta in 1991. Meles became president, then prime minister in 1995. He retained his seat in the 15 May elections.