The House of Commons' Women and Equalities Committee concluded Muslim women are the most disadvantaged group in British society and a new government plan was required to tackle the inequalities before the end of the year.
The cross-party committee said many Muslim women in the UK faced a "triple penalty" impacting on their job prospects - being women, being from an ethnic minority and being Muslim.
"The impact of Islamophobia on Muslim women should not be underestimated. They are 71% more likely than white Christian women to be unemployed, even when they have the same educational level and language skills," reads the report titled 'Employment Opportunities for Muslims in the UK'.
While 69% of British working-age women were in employment, among Muslim women it was 35%.
Nationally, 5% of women were unemployed and seeking work but among Muslim women, it was 16%.
Among women generally, 27% were economically inactive or unemployed and not seeking work last year. However, among Muslim women the figure was 58%.
"There is a distinct level of institutional racism that is being endured by Muslim women and we must be open about that," said Maria Miller, chair of the committee.
"Everybody is subject to the same law in this country and Muslim women can choose to dress in the way that they want in the same way that other women can and shouldn't have to suffer discrimination as a result of it.
"One of the young women who gave evidence to us told the committee in an informal sitting that she had decided not to wear a headscarf and was struck by the different way she was treated both by people she didn't know but also people she knew," she added.
Nearly half (44 per cent) of economically inactive Muslim women are inactive because they are looking after the home; this compares with a national average of 16%of women who are inactive for this reason, says the report.
Married women in Muslim communities are often expected to be home-makers while their husbands are the breadwinners, the committee heard from expert witnesses.
"The impact of the very real inequality, discrimination and Islamophobia that Muslim women experience is exacerbated by the pressures that some women feel from parts of their communities to fulfil a more traditional role," it said.
"The Equality Act applies to everyone and all women, regardless of faith, should be free to make their own choices about all aspects of their lives, including education, employment and dress, and subsequently be empowered to overcome the disadvantages they may face," it concludes.
The committee also flagged up a concern the government's "Prevent" programme against radicalisation within the UK's Muslim communities was alienating some women.
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