PARIS (Reuters) - Only bold reforms backed by a cross-party social consensus can reverse France's relative decline and transform it into a dynamic economy in the next decade, a report commissioned by President Francois Hollande said on Wednesday.

The study "France in 10 years' time" by the government's strategic planning think-tank said "small steps" reforms in recent years of pensions, welfare and labor markets had yielded meager results while creating a sense of permanent insecurity.

France, Europe's number two economy, had lost ground against its peers in output per capita, education and employment in the last 25 years and its current trajectory was "economically, socially and financially unsustainable".

Social spending took a bigger chunk of resources than in other advanced industrialized states and was largely funded by increasing public debt.

The French were also more pessimistic about the country than about their personal prospects and - based on 2012 Eurobarometer polling data - had the second highest level of ethnic tension in Europe, the report said.

"A majority of French people see the future as like the present only worse," said the report written by economist Jean Pisani-Ferry, head of France Strategie.

In comments as critical of the Socialist Hollande as of his conservative predecessors, he said Paris must break with a gradualist approach that had produced five pension reforms in the last decade without solving the problem of sustainability.

France needed to cut its debt to 75 percent of gross domestic product in 2025 from nearly 92 percent last year and cut the share of public spending to 49 percent of GDP over the same period from 57 percent today - the highest in the EU.

"In terms of social welfare, we are at the same level or slightly better than others, but at the cost of much higher public spending to achieve the same result," Pisani-Ferry said.

The report called for a reshaping of education policy to focus resources in the most deprived areas to cut the number of high school dropouts, a big turnover in the political class by stopping politicians holding more than one public office, and a shake-up of the civil service to bring in more outside talent.

The report says France can only recover its international standing by opening up to the world, welcoming more foreign students and embracing globalization and European integration, which goes against the grain of widespread protectionism, fear of globalization and National Front nationalism.

Some recommendations are being implemented cautiously with plans to reduce the number of regions and eventually scrap territorial departments, removing one of four layers of local government, and moves to ease the tax burden on business.

(Writing by Paul Taylor; Editing by Alison Williams)