Mr Obama, in a major speech on US policy last year, said drone strikes "had saved US lives" by taking al-Qaeda commanders off the battlefield, and the attacks had been proportional, in self-defence and legal.
But the report is perhaps most critical of the evolving legal doctrine cited by both the George W Bush and Obama administrations to justify their strikes against "combatants" in the "war on terror."
Read More Dealing in Drones: The Big Business of Unmanned Flight
"The legal norms governing armed conflicts and the use of force look clear on paper, but the changing nature of modern conflicts and security threats has rendered them almost incoherent in practice," the report says.
"Basic categories such as 'battlefield', 'combatant' and 'hostilities' no longer have clear or stable meaning. When this happens, the rule of law is threatened."
The report recommends that the US conduct a rigorous cost-benefit review of the use of drone strikes and also increase the transparency surrounding them.
Read MoreThe US jet fighter that can do it all—maybe
Drone technology is already spreading rapidly around the world. In recent days, US officials have noted how Iran has been using drones to gather intelligence on the militant groups threatening the government in Baghdad.
In its latest annual report on the Chinese military, the Pentagon said it was "probable" that China used a drone for a reconnaissance mission in the East China Sea in 2013 and it had revealed details of four different drones under development.
It cited another Pentagon report that claimed the China drones programme enjoyed "unlimited resources" and "might allow China to match or even outpace US spending on unmanned systems in the future".
—By Richard McGregor, The Financial Times