The study warns that the British military is close to breaking point at the very time when forces need strengthening to cope with Islamic extremism, resurgent militarism in Russia and rapid rearmament by China.
The document explains how spending plummeted at the end of the Cold War but has never been restored to help the military cope with a string of unexpected and demanding wars in Bosnia, Kosovo, Sierra Leone, Afghanistan and Iraq.
The Ministry of Defence's own surveys show almost half of all personnel are considering resigning as overstretched units struggle to cope.
At the same time there are grave threats to global stability from nuclear-armed Pakistan, Iran, China and Russia.
The report, from the UK National Defence Association campaign group, warns the current defence budget is 'manifestly inadequate to meet the threats facing Britain in either the short, medium or long term'.
It adds: 'Defence provision should be threat driven, not budget driven.
'Remedial action is required now. It cannot be deferred.'
Backers of the report include former Chief of the Defence Staff Air Chief Marshall Sir Peter Harding, former Chief of the Air Staff Sir Michael Graydon and former first sea lord Admiral of the Fleet Sir Julian Oswald.
Since 1987 the number of infantry battalions in the British Army has dropped from 107 to 50, and units are crippled by lack of manpower, effective radios, helicopters and mine-proof vehicles, the report warns.
The RAF has lost half its aircraft over the same period, with the operational strike bomber fleet cut from 368 to 197, and fighters down from 259 to 91.
The Royal Navy's fleet of destroyers and frigates is down from 54 to 25, and submarines down from 15 to just nine.
The MoD rejected the criticisms last night.
A spokesman insisted that the defence budget was 'experiencing its longest period of sustained real growth for over 30 years.'