Name-calling is rife in many schools, but is often dismissed as simply "banter", according to a new Ofsted report into bullying.
It found that pupils are using insults relating to sexuality, intelligence, race, appearance and family circumstances, with some saying it was acceptable if the words were being used between friends.
But while students admit to using language that they know is inappropriate, the report also raises concerns that some teachers were not aware how frequently it was being used.
The Ofsted report, based on visits to 56 schools and discussions with around 2,000 pupils and staff, looked at the best ways that schools can prevent and tackle bullying.
It said it was clear that pupils were using derogatory language outside of the classrooms, such as in the playground, although at times it spilled over into lessons.
Words such as "stupid", "idiot", "mong", "spazzer" or "spaz" were used when pupils struggled with work or a sport, it said, while other youngsters told inspectors that terms like "gay", "slag" or "slut" could be used against classmates.
The report warned that "gay" was often used as an insult, with one secondary school pupil saying it was used to mean "rubbish".
School staff also said that the use of the word "gay" was a "common issue".
"The disparaging language most commonly heard by pupils in both primary and secondary schools related to perceived ability or lack of ability - mainly the latter; race and, less commonly, religion; sexuality; appearance; family circumstances; and, in secondary schools, sexual behaviour," the report said.
At the same time, some of the staff in 24 of the schools visited said that they never heard prejudiced language from pupils.
It adds that inspectors found that it was common in many of the schools for youngsters who are disabled or have special needs and those that are, or are believe to be homosexual to be called names.
While many pupils knew this was not acceptable, it was often seen as "banter", the report says, and that staff were not aware of the extent of its use, or saw it as banter themselves.
The report adds that many of the pupils questioned knew that using derogatory language was wrong because it hurts people's feelings, and can make them upset or angry.
But it adds that the views of other students was more worrying.
"In two of the primary schools and 11 of the secondary schools, although pupils knew that certain language was generally inappropriate, if the words were used between friends they were seen as 'banter' or 'just joking' or 'messing about', which pupils thought made their use acceptable.
"This generally did not extend to racism (which was almost universally seen as the worst insult and as unacceptable) but always included 'gay' and 'lesbian' and often included words related to disability and appearance. For a few pupils even racist terms were seen as acceptable 'between friends'."
Susan Gregory, Ofsted director of education and care, said: "Schools must develop a positive culture so all pupils learn in a happy and safe environment. Teachers should receive the right training and support so they have the skills and confidence to teach pupils about diversity and the effects of bullying."
Brian Lightman, general secretary of the Association of School and College Leaders (ASCL) said: "School leaders know that bullying can cause untold misery and wreck the lives of young people, and they are committed to tackling it in all forms. This is a helpful report and although many of the findings will not come as a surprise, it will allow schools to review what they do against the best practice it identifies.
"Schools tackle bullying through a culture of clear expectations, anti-bullying policies which are consistently implemented and understood by pupils and adults, explicit sanctions, frank discussion with pupils about the effects of their language and their actions, and an open climate in which young people who are bullied or witness bullying feel confident to come forward immediately."
Christine Blower, general secretary of the National Union of Teachers (NUT), said: "The NUT believes respect should be accorded in our multicultural society, regardless of race, religion, gender, disability or sexual orientation. Bullying ruins lives and must not go unchallenged.
"There needs to be the time devoted in the curriculum to preventing bullying through challenging negative attitudes. The lessons learnt make a significant difference to pupils' attitudes, not only during their school career but throughout their adult life as well."
Peter Liver, of the National Society for the Prevention of Cruelty to Children (NSPCC), said bullying was "still a big problem for children in the UK".
The charity's ChildLine advice and support service dealt with more than 32,000 contacts from children about bullying - some as young as seven, Mr Liver said.
"Over half the children who contacted ChildLine said the bullying happened at or on the way home from school. Though many schools now have anti-bullying policies, this report shows that these are only as good as the staff's ability to carry them out.
"Unless teachers are given the skills and confidence to tackle bullying, for many children school will continue be a place to fear, not a place to learn," he said.