The media regulator said its review of children's TV, the most detailed assessment carried out to date, showed that homegrown children's programmes accounted for just 17% of the total output aimed at youngsters.
But the report found that parents and children "strongly" preferred programming made in the UK.
However, fewer than half of parents think that public service broadcasting is delivering satisfactory standards, especially in reflecting a range of cultures and opinions.
The report decried the rapidly declining contribution from commercial broadcasters to the children's TV market.
It found that investment in first-run programming by ITV1, GMTV and Five has halved in real terms since 1998.
The Disney Channel, Nickelodeon and Cartoon Network commission some UK programming, but not nearly enough, with their investment in new programmes accounting for just 10% of total UK investment.
Although parents value the BBC's programming, the report raises questions about whether it is in the audience's long-term interest for the BBC to strengthen its position as the largest commissioner of UK children's programming overall.
ITV has dramatically scaled back its kids' TV output in the last 12 months in light of a clampdown on food advertising around children's programming and the increasing range of media available to children.
The commercial broadcaster said it no longer made "commercial sense" to schedule children's shows in ITV1's afternoon schedule.
The figures bear out these concerns, with overall revenues to commercial children's broadcasters in the UK down from £178m in 2001 to £141m in 2006, a decline of 21%, with advertising revenues down by 36% during the same period.
Ed Richards, Ofcom chief executive, said: "This comprehensive study highlights the decline in homegrown commercial children's TV production and the revolution in young people's media consumption.
"The market has been transformed by increased competition and audience fragmentation."
Richards said there now needed to be a national debate on the future of children's programming, and the regulator has timetabled a report outlining proposals for a planned approach to children's programming for next spring.