Too many honours are awarded to politicians, celebrities and civil servants rather than to people who devote time and effort to their local communities, MPs have said.
The Commons Public Administration Select Committee condemned the granting of knighthoods to businessmen and senior officials for simply "doing the day job".
It called for a radical overhaul of the system, with the stripping out of all political influence and the creation of an independent honours commission, in order to restore credibility in the eyes of the public.
In its report, the committee said that honours should only be given for "exceptional service above and beyond the call of duty".
David Cameron has made clear that he wants the "vast majority" of honours to go to individuals who have gone "beyond excellence" in contributing to his vision of a "Big Society".
However, the committee said there was still a perception that celebrities and sports stars were more likely to be honoured than people who had put in years of service to their communities.
Despite efforts to change public perceptions, it said there was still a belief that honours were used to thank donors to political parties, or were received "automatically" by senior civil servants.
"We believe that no-one should be honoured for simply 'doing the day job', no matter what that job is," the committee said. "In particular, honours should not be awarded to civil servants or businessmen unless it can be demonstrated that there has been service above and beyond the call of duty."
The committee rejected assurances by the head of the Civil Service, Sir Bob Kerslake, that there were no "automatic honours" for certain senior officials. It pointed to the recent example of the Cabinet Secretary, Sir Jeremy Heywood, who was awarded a knighthood the day before he took up his post. His predecessor, Lord O'Donnell, the committee noted, had received four honours as a result of his Civil Service career.
Bernard Jenkin, the committee chairman, said: "The public values the honours system, and it commands a significant degree of public confidence, but people still say that honours appear to be awarded through a mysterious process by the various committees to the usual suspects they already know. Far too few are being awarded to ordinary citizens for the extraordinary contributions they make to their communities - which is what the honours system should be for. There should be no 'automatic' honours for people who hold a certain post, or for celebrities and sports stars at a certain level, but too often it seems this is still the case."