The report, from consultants Ecotec, is highly critical of both the Liberal Democrats, which have held power for two years, and the Labour group, which used to control the council.
It says: 'Too often policy and behaviour are driven by a personal animosity between the Labour and Liberal Democrats that goes beyond politics.'
It calls on councillors to draw up an understanding between political groups to identify areas where they will work together and those where there are 'grounds for robust, legitimate political debate'.
It criticises pockets of poor management within the council and the legacy of a tightly controlled, centrally run authority, but it praises chief executive Alan Kilburn's modernisation plans and accepts the authority is more challenged than most.
'Oldham's task is doubly difficult, confronted as it is with a lack of social cohesion, a legacy of segregation and targeted by political extremists,' it says.
Mr Kilburn compared it to the report drawn up by retired civil servant David Ritchie following last year's riots in the town.
'We requested it and are working on its findings to prepare us for the more substantial Audit Commission inspection,' he said.
'We asked Ecotec to use Audit Commission methods and not to pull any punches. They have told us where we are strong and where we are weak.
'It raises issues of whether party politics have got in the way of decision making, but one member's consultation is someone else's delay.'
Senior officers and senior councillors have discussed the report, which is now being circulated to all councillors.
This report follows an earlier investigation by consultants KPMG into how regeneration programmes were performing in Bradford, which was also badly affected by social unrest last year.
In the report, commissioned by regional development agency Yorkshire Forward, KPMG said it had found regeneration programmes and partnerships were seriously hampered by party political tensions, especially those between the council and the local regeneration partnerships.
It said the they were 'overly political' and were severely hindering progress and the injection of new life into those areas of the city with a depressed economy.
The Audit Commission's corporate governance inspection report into Oldham is due to be published in July.