Durham Free School opened in September 2013. Free schools receive their funding directly from central government, rather than their Local Authority. As such, they are not under Local Authority control. Free schools are governed by charities or other non-profit groups.
The Education Funding Agency, which allocates money for schools, also said it has "serious concerns about financial management, control and governance" at Durham Free School.
The two reports prompted the Education Secretary, Nicky Morgan, to pull Durham Free School's funding.
Durham Free School have indicated on their Facebook page they will "fight" the Department for Education's ruling.
Ofsted said about the school: "Student's achievement is weak... standards are low and progress is inadequate.
"...too much emphasis [is placed] on religious credentials... and not enough on candidates with excellent leadership and teaching skills.
"Some students hold discriminatory views of other people who have different faiths, values or beliefs than themselves.
"The behaviour of some students led to unsafe situations... students call each other unpleasant names and there are many instances of bullying.
"Until very recently, the religious studies curriculum was too narrow and did not give opportunities to learn about different faiths and beliefs.
"Consequently, student's understanding of different faiths and beliefs is sketchy with some holding prejudiced views which are not challenged.
"... there are too many instances... where the behaviour of students is poor."
Durham Free School have said in a statement: "The news today was as shocking and unexpected for the school and governors as it was for parents.
"There are a number of irregularities in the action that the government is taking and the school is taking professional advice.
"The official notice to the school announcing the intention to withdraw the Funding Agreement was only sent this afternoon and invites the school to make representations in response to the notice by early in February, so there is an official opportunity to dispute the action the government is taking.
"The comments of many parents about the difference the school has made in their childrens' lives have been truly heartwarming and the school will be using every avenue and opportunity to fight to remain open."
