The Greater London Assembly (GLA) has slammed the trade's Public Places Charter on smoking for being "ineffective" and having standards that are "too low".
But members of the GLA have decided not to recommend a complete ban on smoking in public places - a decision that has been welcomed by the trade.
The GLA did, however, strongly criticise the trade's attempts at self-regulation and said the charter needed a shake up.
The assembly's report on smoking should serve as "a wake-up call" for licensees who have not yet signed up to the charter, co-author of the report Angie Bray said.
"There needs to be a much greater take up of the code," Ms Bray added. "We are also pushing for higher standards of ventilation and for more licensees to introduce no-smoking areas."
Press reports had suggested the GLA would recommend a total ban on smoking after research discovered up to 1,000 Londoners die each year from coronary heart disease caused by passive smoking.
Anyone who works in the hospitality industry or visits a pub two or three times a week is most at risk from passive smoking, the report claims.
"We now hope that the recommendations we have made will drive forward the issue of smoking," Ms Bray said. "We have said the voluntary charter needs firming up and we are pressing for more research and better technology.
"It would not have been right to introduce a total ban on smoking in public places at a time when the hospitality industry has suffered considerably after September 11 and foot-and-mouth."
However, Nick Bish, chairman of the trade's Charter Group, said he was far from happy with the report.
"Some of the GLA's recommendations are just completely unreasonable and impractical," he said.
"They are implying that the Charter Group is too little too late but I would say the group is the best act in town," he said.
"About a third of pubs have non-smoking areas, and thousands now meet our challenging ventilation standard. The situation is improving every day and the evidence is everywhere.
"It's a pity that the GLA didn't look around it. Almost half of pubs use charter signs to display their smoking policies on the outside of the premises - so it is easy to see what the atmosphere is likely to be before you enter. There is real choice already."
Clive Bates, director of the anti-tobacco campaigning group ASH, said: "We want to see a steady move to the smoke-free environments that most people want. Pubs should have smoke-free areas and ban smoking at the bar to reduce the impact on barstaff."
For more information about signing up to the trade's charter contact 020 7369 5630 or visit www.airinitiative.com.