The report compiled by the European Union Agency for Fundamental Rights (FRA) and published in Madrid on Thursday surveyed 23,500 members of ethnic minorities and migrant communities in Europe.
It collated the opinions of Muslims living in 14 European nations and minorities in general from the 27 EU member states.
It found that one third of the Muslim respondents said they were discriminated against in the past 12 months, and 11 per cent said they had been victims of racist crime.
About 30 percent of the discrimination cases occurred when Muslims were looking for work or at work, while 14 percent took place in bars, restaurants or in dealings with landlords, the report said.
"The high levels of discrimination in employment are worrying," FRA director Morten Kjaerum said. "Employment is a key part of the integration process."
Muslims from Africa worst off
The survey also found that 81 percent of those interviewed did not report discriminatory acts, largely because they believed that reporting them would not change anything.
The report called on EU governments to tackle discrimination by making people aware of how to file complaints about discrimination and racism.
The report said that Muslims from Africa suffered the most prejudice. Muslim immigrants in Malta and Italy were subjected to particularly harsh discrimination, the report added.
64 percent of African Muslims in Malta and 55 percent in Italy said they were discriminated against last year. Both Italy and Malta are the preferred destinations for hundreds of illegal immigrants from Africa each year who arrive on the nations' shores in rickety boats.
Agency concerned about ethnic profiling
The report also found that wearing traditional or religious clothing does not increase discrimination. And most of the Muslims surveyed did not consider religion as the main reason for discrimination.
Only ten percent of Muslims who experienced prejudice said this was solely due to their religious beliefs while over half of the respondents felt their ethnic origin was the reason for the discrimination.
The report said that ethnic profiling was on the rise in the European Union.
Two fifths of Muslims said they had been stopped by police in 2008 on the grounds of their ethnic origin.
The report concluded that authorities needed to assess ethnic profiling and find out if it "effectively increases the identification of criminal activity or alienates and discriminates against Muslim communities."
Editor: Susan Houlton