Mr Byers said he is considering the commission's report, but intervention is likely after he stated last month he was 'minded' to use the powers granted to him under the Local Government Act 1999.
Following the commission's recommendation, Mr Byers said: 'We will take whatever steps are necessary to ensure front-line services are not put at risk and local people get the quality services they need and deserve.'
It will be the first time these powers have been used, but inspectors say they were left with no option but to recommend intervention after finding Hackney LBC is still in dire financial straits.
Audit Commission controller Sir Andrew Foster said: 'We do not believe Hackney has made sufficient progress in implementing the recommendations made in our November 2000 report. Urgent action is needed.'
The commission report said deep-rooted problems remain at Hackney LBC and the council's financial position is worse than anticipated in November (LGC, 9 November 2000).
The council faces a deficit of around£21m by the end of the financial year. Conservative local government spokesman Nigel Waterson said: 'Stephen Byers is dithering in the face of Hackney's
implosion and has failed to give direction.'
The report said some improvements have been made and the council now has a fuller picture of its financial difficulties and some gaps in senior management have been filled.
Leader Jules Pipe (Lab) said: 'We have the will and determination to tackle the problems we face, what we lack is management capacity and the money required to bridge the gap in our budget.'