The report by auditors KPMG gave Sydney a score of 40 out of 100 for its budget performance, population planning, housing affordability for key workers, and traffic congestion.
Adelaide finished top of the league on 73 points, followed by Canberra (68), Hobart (58), Brisbane (55), Darwin (53), Melbourne (48) and Perth (45).
Sydney only fared slightly better in a separate table measuring the performance of capital cities against nine criteria set out by the Council of Australian Governments (COAG) in December 2009, finishing third from the bottom on 47 points.
Melbourne topped the COAG criteria on 69 points, followed by Brisbane (64), Adelaide (61), Perth (56), Canberra (54), Sydney (47), Darwin (44) and Hobart (38).
The COAG criteria include subjects such as integration, social inclusion, housing affordability and health.
The organisation that commissioned the research, Built Environment Meets Parliament (BEMP), has urged the Rudd government to make cities a central nation-building priority.
Peter Verwer, CEO of the Property Council of Australia, one of a number of organisations that make up BEMP, said: "Delivering long-term plans to manage future growth is essential if Australia is to have more liveable, sustainable and productive cities.
"There can be no nation building agenda without lifting the performance of our cities."
