A panel of executives at the World Bank says its President Paul Wolfowitz broke bank rules in awarding a substantial pay rise to his girlfriend.
The directors said the full board of the World Bank should consider whether Wolfowitz was still able to provide effective leadership.
He is due to appear before the full 24-member board in Washington.
The board has the power to dismiss Wolfowitz, reprimand him or report a lack of confidence in his leadership.
In remarks released ahead of the board meeting, the panel said Wolfowitz provoked a "conflict of interest" at the World Bank.
It ruled he had broken the bank's code of conduct and violated the terms of his contract.
The full board must address the issue of Wolfowitz's ability to continue in his job, the panel urged.
A spokesman for the US treasury secretary said the panel's findings did not merit Wolfowitz's dismissal.
Censure 'likely'
"[The board must consider] whether Wolfowitz will be able to provide the leadership needed to ensure that the bank continues to operate to the fullest extent possible in achieving its mandate," the panel concluded.
The BBC's James Westhead, in Washington, says the signs do not look good for the World Bank head, with the tone of the panel's comments suggesting he will face at least some kind of censure.
Wolfowitz has faced calls for him to step down since details emerged about his role in securing a pay rise for his partner, Shaha Riza, after he was appointed president of the World Bank in 2005.
When Wolfowitz took over Riza was transferred to work for the US state department, to avoid any conflict of interest.
But her salary rose quickly to about $193,000 (£98,000) - more than the $186,000 Secretary of State Condoleezza Rice receives before tax.
The World Bank has since been investigating the extent of Wolfowitz's role in securing the pay increase.
Wolfowitz has received the backing of senior figures in the US administration, including an endorsement by Vice-President Dick Cheney.
But he is less popular with European governments, which hold key positions on the board of the bank.
Wolfowitz was considered a controversial choice ever since President Bush nominated him to head the World Bank, because of his high-profile role during the early part of the Iraq war.
PHOTO CAPTION
World Bank President Paul Wolfowitz is seen here 02 May 2007. US President George W. Bush continues to back embattled Wolfowitz, White House spokesman Tony Snow said Monday. (AFP)
BBC