An independent review by London Economics said "the government should consider ending" the £1.5m annual sum it pays to help provide milk to 1.3m children across 12,000 schools.
The Department for the Environment, Food and Rural Affairs paid £36,000 for the report to be carried out, and copies have been handed to the Department of Health and the Department for Educations and Skills.
Jim Begg, director general of dairy industry association Dairy UK, urged the government to continue supporting milk in schools.
"This is about getting a nutritional product into schools," he told www.DairyReporter.com, adding it did not make sense to "dismantle a tried and tested way of encouraging children to drink milk" at a time of concern over childrens' nutritional intake.
"It has the support of pretty much everybody. If you look at the comments submitted [in the report] it is clear that schools, authorities, parents and teachers all support this as a good way to get children to choose milk."
Of the 65 participating schools asked by the researchers, 58 thought the subsidy money was well spent.
The UK government's £1.5m subsidy acts as a top-up to annual sums already handed out by the European Union to put milk into schools.
The total subsidy is around £7.2m in England, with parents on average paying an additional 11.4p for a third of a pint. The EU subsidy is already set to be cut by 16 per cent up to July 2007 as part of Common Agricultural Policy reform.
Begg said schools relied on the UK 'Top Up' subsidy to help with administration costs of running milk schemes. "If this is taken away, our concern is that schools will become less encouraged to participate."
The report says the subsidy does not make sense, and even advised the government to think about persuading EU members to stop the school milk subsidy programme completely.
"The private sector already offers milk at a low price, so it is not clear why schools should offer it also." It pointed out that Tesco supermarkets were selling whole pints of milk for 30p at the end of 2004.
The report attacked the high administration costs incurred by the UK subsidy.
The total £7.2m subsidy creates £5m-worth of administration costs for schools, it says. "On average, schools pass only 30 per cent of the combined EU and Top-Up subsidy to parents, retaining the other 70 per cent, or £5m, to cover their costs of administering the scheme."
The scheme's failure to get kids drinking milk over the long-term also came under fire.
The report said a survey last year found that between 70 and 80 per cent of children aged 11-18 years, a group not covered by the milk scheme, were consuming less than the recommended daily intake of calcium, while those aged between four and 10 got more than the recommended amount.
As a result, the report says only milk schemes targeted at more specific groups, such as nursery kids, teenage girls and children from poorer families, should be subsidised.
It also suggested more money could be given to other school nutrition schemes, such as subsidised fruit. There are two such schemes currently running, although the report says around one in five British children eat no fruit at all.
Dairy UK hopes to head-off talk of change. The dairy industry, afterall, successfully lobbied for the European Commission to keep school milk subsidies, albeit with a cut, in 1999.
Begg said "I hope the government will consider all of the comments in the report," said Begg. "We are happy to work with the government to ensure the subsidy is administered efficiently."