"Given the under-financing of the programme and the compensation claims over delays in delivery, Airbus will not be able to make the necessary investments to make the needed improvements," read an extract from the German defence ministry report seen by AFP.
"Operational use of the aircraft is therefore in danger," it continued.
The A400M is the most ambitious joint procurement programme ever launched in Europe, involving seven countries: Belgium, Britain, France, Germany, Luxembourg, Spain and Turkey.
But while the nations ordered the planes in 2003, the first were not delivered until 2013 - four years after the contract fell due.
Of some 50 bought by Berlin, just eight were delivered by 2016, and those quickly turned out to suffer from technical problems and shortcomings.
"These aircraft will not fulfil important tactical capabilities, or only fulfil them to a limited extent, in the foreseeable future," the report concludes.
That could lead to problems for the Bundeswehr, the German armed forces, after 2021, when its ageing fleet of Transall transport planes is set for retirement.
"The A400M shows in daily deployments that it is a capable aircraft," a defence ministry spokesman told AFP, while refusing to comment on details of the report.
"The fact that it can't do everything it's supposed to according to the contract is well known. Of course the manufacturer is obliged to find solutions" where it has failed to live up to specification, he added.
An Airbus spokesman said the programme has "made significant progress over the past year in the areas of defensive measures and paratrooper deployment".
The A400M's four turboprop engines allow it to transport up to 37 tonnes of freight up to 3,300 kilometres (2,000 miles), and it is capable of landing on rough ground including sand.
It can transport armoured vehicles or helicopters, drop paratroopers and refuel helicopters in mid-air.