Academic selection should be made illegal, a report on promoting shared education said.
All-ability post-primary schools using more flexible streaming and collaborating with other institutions must be created to drive up standards, a ministerial advisory group led by Queens University Belfast (QUB) said.
Ministers were also urged to make schools legally accountable for promoting equality and good relations.
Group chairman Professor Paul Connolly said: "The current system that only offers two educational pathways - grammar or secondary - and that determines which pathway a child will follow based upon one high-stakes and unregulated test at the age of 11 is divisive, archaic and not fit for purpose."
Ministers have been unable to introduce legislation because of divisions between Sinn Fein and the DUP and tests have been introduced for entry into many schools despite the end of the state-sponsored 11-plus.
The report recommended: "The Northern Ireland Executive should, without delay, introduce the necessary legislation to prevent schools from selecting children on the basis of academic ability and require schools to develop admissions criteria that are truly inclusive and egalitarian in nature."
Prof Connolly said there was clear evidence that the system of secondary and grammar schooling was creating and sustaining divisions on the basis of socio-economic background while exacerbating achievement gaps. The proportion of school leavers after GCSE gaining five or more grades A*-C including maths and English was almost 32% in 2011 among those from more disadvantaged backgrounds, compared to almost 35% in similar circumstances in England.
The panel, appointed by education minister John O'Dowd and including former Progressive Unionist Party leader Dawn Purvis and retired school principal PJ O'Grady, said there should be a more diverse school system reflecting parental choice, with popular schools allowed to grow and new institutions emerging with a distinct religious and cultural ethos. Those include faith-based, integrated, secular or Irish medium schools.
Northern Ireland First Minister Peter Robinson has said he wants to bring Catholic and Protestant children closer together in Northern Ireland and has urged an end to religious "apartheid" in schools. The report said the education department should encourage sustained collaboration between schools from different sectors, especially through the area-based planning process.
Mr O'Dowd said: "I am committed to providing all children with an opportunity to experience shared education, which I believe has the potential to deliver real educational benefits, to ensure best use of resources and to further community cohesion."