David Cameron has been urged by MPs to consider legalising and regulating drug use as part of wide-ranging public debate on the current strategies which have "failed".
The Commons Home Affairs Committee said there was not enough focus on helping users break their habits and urged ministers to learn from the experience of Portugal where drugs have been "depenalised"- with possession of small amounts not subject to criminal penalties, even though they remain illegal.
It also said the law should also be amended so that retailers who sell untested "legal highs" can be held liable for any harm the products cause .
"It is unacceptable that retailers should be able to use false descriptions and disclaimers such as 'plant food' and 'not for human consumption' as a defence where it is clear to all concerned that the substance is being sold for its psychoactive properties," it said.
Studies of changes in Washington and Colorado in the United States - where cannabis is being legalised - and Uruguay where a state monopoly of cannabis production and sale is being proposed, should be undertaken, it said.
Ten years after its predecessor committee last looked at the issue, it claimed change was now urgent and that a Royal Commission should be set up immediately so it could report back by 2015, when the next general election is due to take place.
In other recommendations, the committee called for the prosecution of senior officials in banks responsible for laundering the profits of drugs gangs and for better drugs education in schools.
However it is the call to consider the possibility of legalising and regulating the use of drugs that will inevitably be the most contentious.
Mental health campaigners warned it was vital not to ignore the links between cannabis use and psychotic illness.
The committee said it was clear from the experience of countries around the world that the current approach was not working, and that alternative strategies - such as those developed in Portugal - should now be considered.
"We were impressed by what we saw of the Portuguese depenalised system. It had clearly reduced public concern about drug use in that country, and was supported by all political parties and the police," it said.
"Although it is not certain that the Portuguese experience could be replicated in the UK, given societal differences, we believe this is a model that merits significantly closer consideration."
Ministers should, it said, open discussions with the United Nations Commission on Drugs on new ways tackle what it called the "global drugs dilemma" - including "the possibility of legalisation and regulation".
At the same time, the committee was highly critical of the government's failure to hit the profits of the drugs gangs, saying its approach to money laundering was "far too weak".
It said ministers should legislate to extend the "personal, criminal liability" of the most senior office holders in the banks involved.
The committee expressed concern that the creation of the recently elected police and crime commissioners could lead to significant local variations in the approach to drugs, resulting in a "geographical displacement" of the drugs trade within the UK.
It said more needed to be done to tackle the widespread availability of drugs in prisons - including mandatory searches of prisoners when they enter and leave jail - while successful treatments such as residential rehabilitation and the methadone substitute, buprenorphine, should be made more widely available.
Committee chairman Keith Vaz said that action was now imperative and ministers could not afford to "kick this issue into the long grass".
"There is no doubt that we have failed to deal with the dealers and we have not focused on the users. Only with this twin approach will we break the devastating cycle of drug addiction in society," he said.
"Drugs cost thousands of lives and the taxpayer billions of pounds each year. This is a critical, now or never moment for
serious reform. If we do not act now, future generations will be crippled by the social and financial burden of addiction."
However, Marjorie Wallace, the chief executive of the mental health charity Sane, expressed concern about the possible impact on cannabis use.
"If the report is to be responsible, it must take account of the specific damage that cannabis can do to the developing brain, not only as recent studies have shown inducing irreversible cognitive deterioration but in around 10% of cases triggering severe psychotic illness," she said.
A government spokesperson said it had "no intention of "downgrading or declassifying cannabis" and added:
"A Royal Commission on drugs is simply not necessary. Our cross-government approach is working.
"We will respond to the report more fully in due course."