The umbrella organisation says that both faith charities and secular organisations feel they are being discriminated against by the growing number of government policies and grants focused on faith-oriented groups.
Recent initiatives have included the Charity Commission's £1.6m faith unit, part-funded by the Department for Communities and Local Government, to improve leadership and governance in faith charities, starting with those relating to Islam.
"Over the years, there's been a growing emphasis on the distinctive contribution of faith-based organisations to society," said Veronique Jochum, research officer at the NCVO and one of the authors of the report. "Sometimes there are specific needs, but if you multiply these separate funding streams, the overall message is about separateness, and that can have a negative impact."
Jochum said that the NCVO had heard from both secular and faith organisations that felt they were not being considered for funding because of their religious orientation - or lack of it.
"The perception is that some local authorities are not keen to give funding to faith-based organisations because there's a fear of proselytisation," she said. "People might feel that others are being given more privileges than them."
The NCVO report also warns that the term "faith communities" is being used as a synonym for Muslim or black and minority ethnic communities. This, it says, is potentially very damaging. It urges policy makers to recognise diversity in roles, attitudes and practices within different faith communities.
The organisation has also called on the Government to ensure that the interests of the broader community are considered when faith groups run public services. It cites the recent dispute over Catholic adoption agencies and whether or not they should work with homo-sexual couples.
Meanwhile, Ruth Kelly, the communities secretary, has said that local authorities should not provide funding to community groups that support one single ethnic or religious group. She told the BBC's Politics Show last Sunday that councils should fund projects that are inclusive. The Commission on Integration and Cohesion, set up by the Government after the July 2005 London bombings, will this week make further recommendations on how to improve community cohesion.