Beate Winkler, head of the European Monitoring Centre on Racism and Xenophobia, told European imams in Vienna that European countries have enough laws to foster integration, but they are not well implemented and real issues are often avoided.
European Muslim leaders at the session, organised by Austria during its presidency of the European Union, supported the goal of integrating their communities and Islam into European life, but said this needed time and creative thinking.
"The level of discrimination against Muslim communities in Europe remains dangerously high," Winkler said.
"Some people stereotype all Muslims as devotedly religious and sharing a fundamentalist view of Islam," she said, which could produce a vicious circle of discrimination and hostility towards Muslims.
"Muslims have a dangerous feeling of hopelessness and withdrawal from the wider community, which in turn leads to alienation, especially among young Muslims of immigrant descent," she said.
Winkler gave no statistical evidence, but said her agency would soon publish two reports on Islamophobia in Europe.
The meeting brought together more than 100 imams from around Europe to discuss ways to better integrate their communities into European life, a job that Benita Ferrero-Waldner, the EU foreign affairs commissioner, said they were well placed to do.
"Islam is as much a part of modern-day Europe as it has been part of its history"
EU foreign affairs commissioner
"This is an absolutely crucial moment in intercultural and interfaith relations in Europe," she said, noting "renewed attention in the so-called clash of civilisations".
"Europe is home to an estimated 20 million Muslims," she said, denying any clash was inevitable. "Islam is as much a part of modern-day Europe as it has been part of its history."
Speakers agreed that public attitudes towards Islam, now the second-largest religion in most European countries, had hardened since the September 11 attacks in the US, bombings in Madrid and the murder of Dutch filmmaker Theo van Gogh.
Winkler said European authorities could help their Muslim minorities by supporting mosque construction, providing time for religious broadcasts in public broadcasting and assuring proper education of imams and teachers of religion.
European Muslims must work more actively against extremism, honour killings, forced marriages, spousal abuse and self-imposed isolation and help solve issues arising from halal butchering or the wearing of headscarves, Winkler said.
"All these cause problems for the majority communities and are getting a heavy media coverage," she said.
Ayatollah Sayed Abbas Ghaemmagami, head of the Imam Ali Islamic Centre in Hamburg, said European imams struggled with the problem of adapting Islam to life in Europe.
"We need some new thinking," the Shia scholar said. "Today we are in dire need of a social model that is just and realistic (and can) arrive at solutions to the problems that prevent integration and peaceful living together."
Amir Zaidan, head of the Islamic Religious Teaching Institute in Vienna, said Islam in Europe needed "a general overhaul of norms and the creation of some new standards.
"We have to put aside all antipathy towards new lifestyles in western Europe so we can see objectively if they are compatible with Islam," he said.