The British government has come under criticism for leaving the military at an unacceptable risk and exposed to serious weaknesses in its fighting ability.
The report on Wednesday from the National Audit Office (NAO), Britain's government spending watchdog, comes as 5000 British soldiers prepare to be deployed to Afghanistan next year.
The deployment will significantly increase Britain's military presence in the country, where about 900 British troops currently serve as part of the Nato-led International Security Assistance Force (ISAF).
The troop increase - agreed at a Nato conference in Brussels recently - is aimed at helping the US-led forces stabilise Afghanistan, which has seen a recent increase in attacks on civilians and foreign troops.
Some unconfirmed reports have suggested that Britain planned to increase its Afghan deployment by relocating troops from Iraq.
The damning NAO report states that across the three services - the army, air force and navy - 38% of forces are suffering from serious weaknesses in their readiness levels and 2% were labelled as critical.
Britain's Ministry of Defence (MoD) runs a graded system of force readiness, with units on high readiness supposed to be able to deploy with between two and 30 days' notice, the Daily Express newspaper said.
The NAO report said Britain's armed forces were on the amber level of readiness, indicating serious shortcomings and one step below red or critical.
Armed Forces Minister Adam Ingram, from Prime Minister Tony Blair's governing Labour party, quoting the NAO, said the MoD had an effective system in place for gauging and reporting readiness levels.
"The risk that the MoD is taking is utterly unacceptable and entirely driven by the ... ambition to save funds"
Conservative party defence spokesman
"No armed forces can be perfectly ready at all times for every contingency, but we must be able to manage effectively the risks to preparing forces for new operations," he said.
"This report underlines our commitment to achieving this complex but crucial task."
But main opposition Conservative defence spokesman Michael Ancram branded the MoD as reckless, saying troops were being sent to fight "with one arm tied behind their back".
"The risk that the MoD is taking is utterly unacceptable and entirely driven by the Treasury's ambition to save funds by depleting the capability and the readiness of our armed forces," Ancram said.
"This is a reckless and highly dangerous practice and the government now has some serious questions to answer," he added.