One of the first free schools to open has been placed on special measures and given an inadequate rating by Ofsted inspectors, in an untimely blow to the government's flagship education policy.

Only days after Labour announced it would end the opening of free schools, curtailing a policy aggressively promoted by the education secretary, Michael Gove, Ofsted inspectors have published the highly critical report into the Discovery Free School, in Crawley, West Sussex, which opened in September 2011.

Inspectors were severe on the primary school's leadership, saying its governors failed to grasp the school's "serious shortcomings", while school leaders "believe the school is far better than it is".

The inspection team gave the school the lowest grade, of "inadequate", in three of four categories, for pupil achievement, quality of teaching, leadership and management. "Too many pupils are in danger of leaving the school without being able to read and write properly," inspectors concluded. "Unless this is put right quickly, pupils are unlikely to flourish in their secondary schools and future lives."

According to Ofsted's scale, a school requiring special measures is "one where the school is failing to give its pupils an acceptable standard of education", and the school's managers and board of governors appear unable to make improvements.

A spokesman for the Department for Education said: "We expect those in charge of Discovery Free School to take urgent action to address the failings identified by Ofsted. We will closely monitor the situation and will not hesitate to take action, including terminating the funding agreement, if the school does not make rapid improvements."

Discovery is a mixed primary taking children from ages four to 11, and describes itself as having "small class sizes, teachers free to teach, parent participation, and Montessori curriculum and approach".

The school has 48 pupils. Montessori is an approach popular in the US and Europe that emphasises independence and self-discipline among pupils, who are often allowed to progress at their own pace.

The establishment of free schools, which are granted approval by the Department for Education after bids from groups of parents or teachers, is one of the reforms of state-funded schooling in England launched by Gove.

On the day the Discovery Free School opened, Gove said: "These schools are opening because of demand from parents for a new or different type of education. Free schools offer a genuine alternative. They offer smaller class sizes, longer hours and higher standards."

So far, Ofsted has inspected 11 free schools out of 81 in the 21 months since the first group of schools opened. Three have received "requires improvement" ratings and seven have been rated "good". No free school has yet been given an "outstanding" rating, while one now has an "inadequate" judgment.

Gove has written to his shadow, Stephen Twigg, attacking Labour's policies in a four-page letter. "I and many other anxious parents would be grateful if you could clear up the confusion surrounding your free schools policy," Gove wrote.

In response, Twigg suggested Gove paid more attention to his own policies. "I fear, however, that you will continue to while away the hours sending letters to me, writing forewords to the bible and dreaming up new names for GCSEs," Twigg wrote.