It also identifies significant shortcomings in the judiciary and new laws that run against EU standards.
The report's publication comes at a time when the EU needs Turkey's help in trying to control the refugee crisis.
It follows parliamentary elections in which President Recep Tayyip Erdogan's Justice and Development Party (AKP) regained the majority it lost in June.
The report itself was delayed because sensitive negotiations on the refugee crisis were taking place with leading Turkish officials including the president shortly before the 1 November vote.
The BBC's Chris Morris in Brussels says the Commission's report seems to pull few punches.
Although Mr Erdogan himself is not named in the report, our correspondent says there are fairly direct criticisms of Turkey's powerful president.
After several years of progress on freedom of expression, it says there has been serious backsliding over the past two years.
The security situation has deteriorated severely, and it is imperative that peace talks resume with the rebel PKK (Kurdistan Workers' Party), the report adds.
Criminal cases against journalists have curtailed media freedom, and changes to the internet law are a significant step back from European standards, according to the Commission.
The independence of the judiciary and the principle of the separation of powers have also been undermined, the report concludes."