Eliyahu Winograd, chairman of the inquiry commission, said the prime minister's declared aims in going to war - to free captured Israeli soldiers and crush Hezbollah - were "overly ambitious and impossible to achieve".
"The problem is not the leaders of Israel but instead it is the Israeli society, it is the Israelis who vote and elect those leaders..."
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The report also sharply criticised Amir Peretz, the defence minister, and Lieutenant-General Dan Halutz, the wartime military chief, but did not call for Olmert or Peretz to resign.
Israel went to war after Hezbollah fighters killed three soldiers and captured two others in a cross-border raid. In 34 days of fighting, Israel failed to return the captured soldiers, destroy Hezbollah or prevent the group from firing thousands of rockets into Israel.
Monday's report criticised Peretz for his inexperience and lack of familiarity with the army, and said Halutz "acted impulsively" and misrepresented the army's readiness.
Winograd said: "We establish that these decisions and the way they were taken suffered from the most severe failures. We put the responsibility for these failures on the prime minister, the defence minister and the former chief of staff.
"If any one of them had acted in a different, better way, the decisions and the way they were made in the period in question, as well as the results of the campaign, would have been different and better."
Although Olmert's popularity has plunged to single digits as a result of the war and a series of scandals plaguing his government, he said he would not resign the post of prime minister.
- July 12, 2006: Hezbollah fighters crossed into Israel, killing eight soldiers and capturing two others.
Ehud Olmert called the action an act of war and blamed the Beirut government.
- July 13: Israel launched air strikes on Beirut's International Airport, the first of many attacks on Lebanon's civilian infrastructure.
Hezbollah started a series of rocket attacks, hitting Haifa in northern Israel.
- July 14: Israeli planes bombed the Beirut offices of Hezbollah leader Hassan Nasrallah.
The next day air strikes were extended to other cities starting with Tripoli.
- July 30: An Israeli raid on a building housing refugees in Qana in southern Lebanon killed at least 28.
- August 14: With Israeli troops still in position in southern Lebanon, a UN-brokered ceasefire came into force.
By then more than a thousand Lebanese civilians had been killed as well as 39 Israeli civilians and 119 soldiers.
In a brief televised statement from his office on Monday, he said: "It would not be correct to resign."
Instead, he said, he would work to implement the conclusions of the inquiry report, calling a special cabinet session for Wednesday to begin the work.
The full commission report is to be released in a couple of months.
Jacky Rowland, Al Jazeera's correspondent in Jerusalem, said: "The wording of the report was much more severe than was expected.
"We understand that even people in the prime minister's circle were shocked."
The report covers the first six days of the war, when Israel battered Lebanon with massive air strikes as Hezbollah pounded Israel with rockets. The report also looks at developments in the six years leading up to the conflict, beginning with Israel's pullout from southern Lebanon in 2000 and tracing Hezbollah's build-up along the border.
A rally calling for Olmert and his government to quit was planned for Thursday in Tel Aviv. The demonstration was being organised by a former general, military reservists who fought in the war and parents of soldiers killed in the conflict.
Rowland said the report is likely to damage Olmert's standing further.
"One newspaper said his standing was somewhere between critical and terminal," she said.
The report's harshest criticism though, is reserved for Halutz, who has already resigned, Rowland said.
At least 1,200 Lebanese, including an estimated 270 Hezbollah fighters were killed in the summer war, as well as 119 Israeli soldiers and 39 civilians.