Ofsted inspectors have harshly criticised an independent Muslim school for promoting Salafi fundamentalist beliefs and rated the school as inadequate, in a possible prelude to it being closed or taken over by the Department for Education.

In their unpublished draft report, the inspectors said the school – the Olive Tree primary school in Luton – fails to prepare its pupils "for life in modern Britain, as opposed to life in a Muslim state", and that its library contains books that are "abhorrent to British society" in their depiction of punishments under sharia law.

"Some books in the children's library contain fundamentalist Islamic beliefs (Salafi) or are set firmly within a Saudi Arabian socio-religious context. Some of the views promoted by these books, for example about stoning women, have no place in British society," the report argues.

But the school's governors and trustees vehemently denied the findings of the inspectors, who had been forced to cut short their visit last week after being confronted by parents upset by their questioning of pupils about attitudes to homosexuality.

Farooq Murad, general secretary of the Muslim Council of Britain, on Wednesday wrote to Ofsted's chief inspector, Sir Michael Wilshaw, asking him to clarify the watchdog's policy on teaching about homosexuality in independent faith schools, in the wake of the Olive Tree inspection.

In a copy of the letter seen by the Guardian, Murad says British Muslims were concerned by reports of the inspection, and calls on Wilshaw to show "evidence to support the assertion that such questions are not only asked of young children at Muslim schools".

Responding to the draft report, the Olive Tree leadership said the school had no books available to children that described or advocated stoning women, and called a claim that the library carried no books on religions other than Islam "an outright fabrication".

"We have a large number of books about different faiths, which the inspectors failed to notice, including The Diary of Ann Frank," said Farasat Latif, the school's chair of governors, who said the library also included works of fiction by authors such as Roald Dahl.

Latif also denied the school was Salafist – a reference to the conservative form of Islam most associated with Saudi Arabia – although he said some members of staff might describe themselves that way.

The school also disputed several of the other claims made by the inspectors, and described the draft report as a "catalogue of lies, half-truths and blatant Islamaphobia".

"The draft report from Ofsted was Michael Wilshaw's way of teaching a Muslim school a bloody good lesson for daring to stand up to them, an attitude not dissimilar to how the colonial masters dealt with the restless natives," it said in a statement.

An Ofsted spokesman said: "We have shared a draft copy of the inspection report in confidence with the school for factual accuracy checking, as is our standard practice. The final report will be published shortly.

"Any concerns that a school has about an inspection should initially be raised during the inspection visit. If concerns have not been resolved, individuals or schools can raise a formal complaint with Ofsted in line with our published complaints policy."

The inspectors also criticised the mixed school – which had about 60 pupils – for inadequate attention to national guidelines on safeguarding and child protection, although it said pupils were well supervised and that staff appointments and record checks were followed correctly.

The snap inspection was ordered by the Department for Education after reports that the headteacher had argued during a BBC radio discussion that homosexuality was punishable by death in an "ideal" Islamic state. Several other independent Muslim schools have also had recent snap inspections ordered by the department.

Under recent updates to the regulations governing independent schools the education secretary can close or replace the leadership of those rated as inadequate.

The draft report also criticised the Olive Tree school's teaching, although it noted that pupils achieved good results in national standardised tests and were well behaved. It also praised the teaching of Arabic as "skilful".

The report makes no reference to homosexuality, although the inspectors wrote: "Pupils' contact with people from different cultures, faiths and traditions is too limited to promote tolerance and respect for the views, lifestyles and customs of other people."

Latif said: "The inspectors scrutinised the pupils' books and found no evidence of fundamentalist beliefs being taught. So their judgment is on the religion and not what is being taught."