Almost one in four children believe that playing video games counts as exercise, according to new research that warns school sport is at a “critical crossroads” at a time when the promised London 2012 legacy is again under the spotlight.

At the approach of the 10th anniversary of the moment when the former London 2012 chairman Lord Coe secured the Games for London with a vow to “inspire a generation” the chief executive of the Youth Sport Trust, Ali Oliver, has warned children risk becoming “hostages to handheld devices” and disengaged completely from physical activity.

“This report clearly signals that action is needed now to modernise the approach to PE and school sport and in doing so guarantee the best possible future for generations to come,” said Oliver, calling on schools to use technology to better inspire pupils to play more sport.

“If we are to avoid a future whereby young people are disengaged from physical activity, living increasingly sedentary lifestyles, we must recognise their needs today, working with government and partners within the education, sport and health sectors to improve opportunities for young people.”

The Youth Sport Trust, the charitable organisation that monitors and co-ordinates school sport, has released the new research to coincide with School Sport Week. Earlier this year, the organisation published figures that showed the average amount of PE offered in schools – no longer measured by the government – had dropped well below the recommended two hours minimum per week.

Baroness Sue Campbell, the chair of the Youth Sport Trust who previously oversaw the creation of the UK Sport formula that delivered an unprecedented upsurge in gold medals at elite level, said then it painted a “bleak and worrying” picture.

The new report, The Class of 2035, seeks to outline a range of possible scenarios for the future of school sport over the next two decades – from an optimistic prognosis where technology and innovation help reverse current trends to one in which children are “effectively isolated from their environment and cut off from the demands of their bodies”.

Eighteen months before the London Olympics the then education secretary Michael Gove scrapped £162m in annual ring-fenced funding for the regional School Sports Partnerships network that linked primary and secondary schools and organised inter-school competition.

Following a huge outcry, he was forced into a partial U-turn. Following the Games, that funding was eventually replaced with £150m a year for primary schools, which has been guaranteed until 2020. Oliver said the PE and Sport Premium – which amounts to £8,000 a year for each primary school plus an additional £5 per each pupil – had helped improve physical literacy and lay “strong foundations” but added: “The challenge is to maintain these gains as children become more engaged with digital technology.”

However, critics say that leaving individual primary headteachers to decide how to spend the extra money has led to a picture of patchwork provision, without the necessary links with local clubs and secondary schools that could help make the most of it. The new YST research shows that three-quarters of young people say they enjoy PE lessons in school, almost two-thirds say they feel better about themselves after doing sport and 40% would like to do more exercise. But nearly a quarter think playing a computer game with friends is a form of exercise and 35% speak to friends more on social media than in person. While some video games require movement, they remain in a minority.

In common with the challenges in adult sports participation – where recent figures showed a worrying overall decline over the last six months – the report illustrates a sharp divide between those who are seen to be “sporty”, who are the main recipients of school and local authority resources, and the rest.

A report from UKActive published last week showed that primary schools were currently failing to adequately track the fitness and activity levels of pupils and monitoring lagged well behind the data recorded for other key elements of the curriculum.

Its research also highlighted figures from 2013 that showed half of seven-year-olds were not meeting the recommended 60 minutes of daily physical activity highlighted in the chief medical officer’s guidelines for children. “We know that even greater numbers fail to meet recommended guidelines as children enter their teens when drop-off rates in activity accelerate,” it said. The new sports minister, Tracey Crouch, has promised a fundamental rethink of sports policy in the wake of the recent disappointing participation figures and has vowed to work more closely with colleagues in the Department for Education and Department of Health to deliver a long term solution.