The UN report also appealed to Israel to provide solutions to the housing crisis in the contested city.
Efforts by Nir Barkat, Jerusalem's Israeli mayor, to expand Jewish settlements on occupied land, have stoked tensions in the city.
Hillary Clinton, the US secretary of state, visiting Israel in March, said demolitions were "unhelpful".
In a response to the UN report, Barkat denied the allegations and disputed the facts, but agreed that there was a "planning crisis" in the city.
"This report is about the past, while Mayor Barkat is committed to the future and providing a better quality of life for all residents of Jerusalem," a statement from his office said.
The crisis "throughout all of Jerusalem ... affects Jews, Christians, and Muslims alike", the mayor said.
He said the issues at hand would soon be tackled comprehensively in the first "master plan for the city" to be drawn up in 50 years.
At least 28 per cent of Palestinian homes were at risk because they were built in violation of Israeli zoning restrictions, the UN report said.
At least 60,000 Palestinians were therefore at risk of becoming homeless.
Many homes were located in areas zoned as "green areas" by the Jerusalem municipality. This included the Silwan area, where the municipality planned to demolish 88 Palestinian residential buildings to make way for an archaeological park.
|More than 195,000 Israelis live in Jewish settlements in East Jerusalem [AFP]
Palestinians say the planned demolitions were aimed at forcing them out of East Jerusalem.
Israel considers Jerusalem to be its indivisible capital while Palestinians want to make East Jerusalem the capital of their future state.
If the demolition orders are carried out it would represent one of the largest forced evictions since Israel occupied mostly Arab East Jerusalem.
"Although the Israeli government has indicated that the houses being demolished did not have the necessary building permits, the fact is that Palestinians lack meaningful access to such permits," the UN Human Rights Commissioner said.
Only 13 per cent of annexed East Jerusalem land area was currently zoned by the Israeli authorities for Palestinian construction, the report said.
Most of that land is already overcrowded by existing construction projects, severely restricting the possibility of Palestinians obtaining a permit.
"Meanwhile, the growth in the number of new structures in Israeli settlements and outposts in the West Bank increased by 69 per cent in 2008, compared to 2007," it noted, citing figures from Peace Now, the Israeli rights group.
The Palestinian population of East Jerusalem, which was approximately 66,000 in 1967, is now about 250,000.
In addition, more than 195,000 Israelis live in Jewish developments - referred to as "neighbourhoods" by the Israelis and as "settlements" by the UN - in east Jerusalem.
Earlier this week, a Palestinian man was sentenced to death by hanging for selling land in the West Bank to Israelis.
Prosecutors at the Palestinian court in Hebron said on Wednesday the man had sold land that did not belong to him in the village of Beit Omar, a move regarded as treason by the Palestinian Authority (PA).
Nour Odeh, Al Jazeera's correspondent in the West Bank, said it remained to be seen whether Mahmoud Abbas, the Palestinian president, would sign the execution order.