The government’s flagship free schools programme has been dealt a blow with the announcement that a third school is to close after a damning Ofsted report found that leadership, teaching, pupil behaviour and achievement were all “inadequate”, the lowest possible rating.

Durham Free School, which has a Christian ethos and opened in September 2013, has had its funding agreement terminated after being put in special measures by the schools watchdog, Ofsted, after an inspection in November.

It follows the closure of the Discovery New School in east Sussex, which was forced to shut last year because of poor standards, and the partial closure of Al Madinah in Derby, the country’s first Muslim free school, which had to close its secondary school after a critical Ofsted report.

One of the complaints aimed at the Durham school, which has 94 pupils and struggled to fill places, was that governors were too bothered about “religious credentials” when recruiting, rather than looking for candidates with excellent leadership and teaching skills. In addition, the inspection team found the school was failing to prepare pupils for modern Britain. The report said: “Some students hold discriminatory views of other people who have different faiths, values or beliefs from themselves.”

It went on: “Student achievement is weak. They do not produce work of enough quality or quantity in order to acquire key skills, gain new knowledge or develop their understanding as quickly as they should. Standards are low and progress is inadequate.”

Teaching was “inadequate”, assessment of students’ work was rated “inaccurate” and “weak” and expectation of pupils’ work was too low. Exclusion rates were high, attendance low and pupil behaviour had led to unsafe situations, particularly on school buses, with “many instances of bullying” and students calling each other unpleasant names. There had also been incidents of students spraying aftershave into other students’ faces, crawling around under seats and failing to use safety belts.

Announcing the termination of funding, education secretary Nicky Morgan said: “The Ofsted report into Durham Free School reveals that children are being let down by a catalogue of failures. It is failing to ensure children are looked after, failing to provide an environment in which children are able to learn, and failing to provide the quality of education that we expect.

“These findings come on top of a review by the Education Funding Agency which identified serious concerns about financial management, control and governance. It is clear that this has been a troubled school for some time and there is no imminent prospect of improvement. We have therefore decided to close the school and will work with the local authority to ensure every child is found a place at another local school where they can thrive and receive the standard of education that they deserve.”

Critics of the government’s free schools programme seized on this latest closure as evidence that the policy was not working. Morgan insisted however that one of the “great strengths” of the system was that failure could be identified and dealt with quickly.

Tristram Hunt MP, Labour’s shadow education secretary, said: “Michael Gove said Durham Free School would raise standards and would add to the quality of education in Durham – in reality it has done the exact opposite. David Cameron’s failing free school programme is damaging school standards – too many are failing their Ofsted inspections, one third have employed unqualified teachers and a complete lack of local oversight is allowing underperformance in these schools to go unchecked for far too long.

“Labour would end the flawed free schools programme and reverse David Cameron’s decision to allow unqualified teachers in our schools. We will deliver a tough new system of local oversight for all state schools, with new directors of school standards in all areas of the country, rooting out falling standards and challenging underperformance.”

Kevin Courtney, deputy general secretary of the National Union of Teachers, the largest teachers’ union, said parents and pupils at the Durham school had been badly let down by the government: “It is clear from the school’s Ofsted report that it was failing to provide a sufficiently high standard of education for its pupils and the Education Funding Agency’s financial notice to improve made clear that the school did not have a sufficient grip on its finances.

“But this is best seen as a failure of the free schools policy. Local authorities can help schools to improve, but Westminster has no effective ways in which to support free schools so instead ends up with these sorts of massively destabilising announcements. The children at this secondary school will now need to settle in alternative schools, which is an unwelcome disruption to their education. In addition, even more taxpayers’ money will now have to be spent on closing down costs such as redundancy pay and rent overhangs. This sad state of affairs shows the folly of handing over taxpayers’ money to unaccountable groups to run schools.”