Rights groups hailed the report as a milestone for the persecuted Rohingya community because the government of Aung San Suu Kyi has previously vowed to abide by its findings.
The western state, one of the country's poorest, has long been a sectarian tinderbox and mainly Buddhist Myanmar has faced growing international condemnation for its treatment of the Muslim Rohingya there.
Annan was appointed by Suu Kyi to head a year-long commission tasked with healing long-simmering divisions between the Rohingya and local Buddhists.
"Unless current challenges are addressed promptly, further radicalisation within both communities is a real risk," the report said, describing the Rohingya as "the single biggest stateless community in the world".
"If the legitimate grievances of local populations are ignored, they will become more vulnerable to recruitment by extremists."
Among the key recommendations was ending all restrictions on movement imposed on the Rohingya and other communities in Rakhine, and shutting down refugee camps -- which hold more than hold more than 120,000 people in often miserable conditions.
The commission's task became increasingly urgent after the army launched a bloody crackdown in the north of Rakhine following deadly October attacks on police border posts by a previously unknown Rohingya militant group.
More than 87,000 Rohingya have since fled to Bangladesh bringing with them stories of murder, mass rape and burned villages in what the UN says could constitute crimes against humanity.
The Annan commission's findings will put pressure on Suu Kyi's government to implement its calls for sweeping changes in Rakhine.
Suu Kyi also has little control over Myanmar's powerful and notoriously abusive military.
Many in Myanmar view the Rohingya as illegal immigrants from Bangladesh, even though many can trace their lineage back generations.
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