* Panel calls for failing schools to face fines
* Report highlights plight of "forgotten families"
By Adrian Croft
LONDON, March 28 (Reuters) - Schools that fail to teach children to read and write should face fines to improve an inadequate education system, a panel set up to draw lessons from riots that swept England's cities last year said on Wednesday.
The panel's report, presented to Prime Minister David Cameron, said there were half a million "forgotten families" who "bump along the bottom" of society and urged the government to develop a strategy to help them turn their lives around.
The panel identified a series of problems facing inner cities, ranging from poor parenting and education to high joblessness that left many people with no stake in society and nothing to lose if they joined the riots.
"When people don't feel they have a reason to stay out of trouble, the consequences for communities can be devastating - as we saw last August," panel chair Darra Singh said.
The Riots Communities and Victims Panel, set up by the government last year but working independently of it, spoke to riot victims and communities across the country to see what people affected by the riots believed led to them.
It said that up to 15,000 people took part in the riots, which broke out in north London but spread to other major cities such as Manchester, Birmingham and Bristol, leaving a trail of torched buildings and looted shops in their wake.
Five people died in England's worst disturbances for decades which cost an estimated 500 million pounds ($800 million), the panel said.
More than 3,800 people have been arrested in London alone in connection with the riots and cases are still being heard by the courts.
The security situation in London will be under international scrutiny in July and August this year when tourists and sports fans flood to the British capital for the Olympics.
Many young people the panel met expressed a "sense of hopelessness" and saw no clear path to work in an era of record youth unemployment.
Noting that a fifth of school leavers can only read at the level expected of an 11-year-old, the panel said schools that fail to teach children to read and write should face fines that would be used to pay for another school to bring them up to the required standard.
The government should guarantee to find jobs for young people who have been out of work for two years, it said.
Youth unemployment is at a record high of more than one million in Britain, or 22 percent of 16- to 24-year-olds.
Many of the committee's recommendations would require taxpayer funding at a time when the government is slashing public services to rein in a big budget deficit.
But Singh urged politicians to pay heed to the panel's message, saying: "Should disturbances happen again, victims and communities will ask our leaders why we failed to respond effectively in 2012."
The report said parents, schools and youth services should try to instil positive attitudes and behaviour in children.
It also took aim at consumerism and marketing directed at young people. Much of the looting was targeted at brands and shops selling high-value items such as clothes, trainers, mobile phones and computers, the report said.
"While no one individual brand is to blame, children and young people must be protected from excessive marketing," the report said.