There were concerns over safeguarding for youngsters at Little Steps Big Steps and the quality of interactions between staff and children was poor, Ofsted inspector Ann Austen said.
The nursery says it is "extremely disappointed" by the findings and says Covid has caused great disruption but that it is now working closely with Luton Council on an action plan to improve.
The report said: "There is a breach of requirements in relation to child protection that undermine children's safety and well-being. Leaders failed to follow local safeguarding partners' policies and procedures regarding the referral of concerns about a child.
"Additionally, staff do not effectively risk assess some play areas. Children are not provided with a curriculum that challenges and extends their learning and development. The quality of interactions between the staff and children is at times poor.
"Staff occasionally lack enthusiasm and fail to implement well-planned and meaningful experiences for the children in their care. They overlook opportunities to extend children's interests and to build on what they already know and can do."
Miss Austen said children's interests were not consistently sustained and some of them demonstrated poor behaviour, impacting on the other children.
"Nevertheless, at times during the day, children participate in craft activities, and enjoy playing outside in the fresh air. Younger children develop their physical skills as they learn to manoeuvre wheeled toys", she said. "Children have opportunities to colour pictures.
"They build towers out of the building blocks and screw nuts and bolts together. However, their concentration and interest is quickly lost. Some members of staff use an animated tone of voice and props when they read a story to the children. This holds most of the children's attention. However, this is not consistent. On other occasions, staff make minimal attempt to engage the children."
And she also raised issues of safeguarding, saying: "Leaders fail to follow local safeguarding partners' policies and procedures regarding the referral of children. Therefore, children are placed at risk of harm. This is a serious breach of the requirements of the Statutory framework for the Early Years foundation stage.
"Staff do not receive adequate support, coaching, and training to enable them to perform their roles and responsibilities to a consistent good level. This includes the development of their knowledge of the curriculum and its implementation, as well as their interactions with the children. Staff fail to risk assess some play areas effectively. This is despite having procedures in place that identify potential risks of harm to children. For example, staff identify trailing electric cables as a risk to children.
"However, they fail to remove the hazard when they complete their daily risk assessment checks. This places children at risk of potential harm."
The nursery in the Old School House, on Trinity Road, provides early education for children aged 2-4, during term time.
Miss Austen said: "Staff are aware of children with known food allergies, including food preferences. Children enjoy healthy food options, such as chopped carrots and cucumber, for their snack. They learn appropriate table manners and some children independently pour their own drink of milk or water. Staff spend time talking to parents and getting to know children's care needs and stage of development before they start at the nursery. Information regarding the children's day and progress is shared at drop off and collection times, and through electronic contact. Parents are happy with the care provided."
But she criticised the management of the nursery, saying despite attending regular safeguarding children training courses, guidance and procedures to safeguard children was not followed.
She recommended the nursery "ensure staff consider the individual needs, interests, and stage of development of each child in their care, and that this information is used to plan meaningful activities and to ensure more positive interactions with the children, ensure all reasonable steps are taken to remove and minimise hazards to children, ensure staff receive effective support, coaching and training opportunities to improve their practice, increase their knowledge of the curriculum provided and their interactions with the children and ensure staff have the skills and knowledge to implement the setting's behaviour management procedures, so that children's behaviour is consistently managed in an appropriate way."
A spokesman for the nursery said: "As a nursery we are extremely disappointed with the outcome. Being a new nursery and having just opened when Covid started has not helped the nursery in terms of stability, children attendance, parents engagement. There has been many disruptions due to Covid with children settling in, attending, their development and parents well-being. Due to Covid we have not had much support from our local authority due to visiting restrictions and also as their staff working from home.
"With Covid easing a little, we are now working closely with the local authority to improve on the grade and have a plan of action. We also have a new Nursery Manager in place to ensure we strive to improve the outcome."