A study by the Children's Commissioner for England raised concerns about both the quality and variation in standards.
It said the system was too focused on minimising the risk offenders presented rather than helping them.
The report called for greater access to mainstream NHS and council services and better training for staff.
More than 6,000 under-18s pass through the youth justice system each year and at any one time there are about 1,800 in custody - the highest per head in Europe.
'Do Better'
The Children's Commissioner's report looked at a variety of services, including youth offending teams, detention centres and secure care homes.
The experts found a system that was too focused on using tactics such as restraining difficult offenders rather than tackling the reasons for their behaviour.
Those in the youth justice system have higher levels of difficulties on virtually every measure of the mental health and wellbeing scale.
“We are currently failing many of these children and young people” Dr Chris Hanvey - Royal College of Paediatrics and Child Health
About 85% of those caught up in the system have personality disorders - eight times higher than the general population.
Some 60% also have speech or language problems, while a quarter have learning difficulties - a figure which rises to 50% for youngsters in custody.
Cases of depression, anxiety, psychosis and self-harm are also higher than average.
As well as improving training and access to services, the report recommended health screening for offenders and more support for when they are discharged from the system.
It also said the size of secure units should be limited to no more than 150 - some can house as many as 400 offenders.
Sue Berelowitz, who led the review team, said: "We owe it to future generations to push ourselves to do better, much better."
Dr Chris Hanvey, of the Royal College of Paediatrics and Child Health, agreed action was needed.
"We are currently failing many of these children and young people."
A Department of Health spokesman said the government would be looking to improve standards.
"We recognise that young people in custody are some of the most vulnerable in society and that good access to health and mental health services is key to breaking the cycle of offending."
From http://www.bbc.co.uk/news/health-13875782
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