Coventry City Council was criticised for a lack of robust management and not seeing vulnerable children fast enough.
Managers at the authority said the department would now receive a £5.6m cash boost.
Daniel, from Coventry, died in March 2012, after being starved and abused by his mother and her boyfriend.
Ofsted's investigation in the wake of his death also stated the effectiveness of the Local Safeguarding Children Board was "inadequate".
Children's Minister Edward Timpson is due to write to the council next week to say what he wants done.
Councillor George Duggins, the city council's cabinet member for children, said staff had struggled because of workloads, which had increased by almost 50% in the past two years.
He said: "There is no hiding from the fact the report's overall findings are disappointing but many of the problems we face, particularly in the front line of children social care, is down to the fact of the unprecedented volume of work which continues to increase."
The Ofsted report said bosses had not tackled weaknesses in social care fast enough.  It said meetings to discuss concerns about children were "not always effective enough" and said police "did not routinely attend".
It also indicated that information about how managers were performing was not always reliable.
Brian Walsh, the council's executive director of people, said a children's board chaired by Birmingham City Council chief executive Mark Rogers was being set up to ensure improvements were implemented.
He said the authority, which is in the process of cutting £22.5m from adult social care, had pledged more money to the children's budget.
In addition to the £5.6m - which will be used to fund 12 extra social workers and 16 agency staff - the council will allocate an extra £4m a year to children's services, from 2015-2016.
"I can never guarantee every child in Coventry will be safe," said Mr Walsh.
"All I can say is we are doing our best to provide a safe and robust service."
A serious case review set up to investigate Daniel's case concluded last September that chances were missed to save the youngster and said at times he was "invisible" to police, NHS and social care agencies.
Now, Ofsted has highlighted 10 areas of children's services requiring immediate action, including the need to ensure private fostering assessments were completed on time.
Mr Walsh said no-one had been sacked due to the failures but said anyone not up to the job would be "dealt with through our normal procedures".
By Phil MackieNews Correspondent
Coventry knows it's under more scrutiny than most local authorities because of what happened to Daniel Pelka. Today's Ofsted report says many of the things that went wrong in 2012 are still not working properly now.
Coventry only has to look to  Birmingham to see how, once things start to go wrong, they can quickly get worse. Birmingham's children's social care department has been rated inadequate since 2009, has changed management several times, has struggled to recruit and retain staff, and has seen a catalogue of high-profile cases from Khyra Ishaq to Keanu Williams, in which young children, known to the authorities, have died.
Coventry will be hoping to emulate another nearby authority, Staffordshire. In a little over two years, its children's services department has been transformed. At the end of 2011 Ofsted said it was performing poorly. Today it is rated as 'good'.
Many of the changes introduced in Staffordshire are also being implemented in Coventry, including creating a multi agency hub where social workers, health workers, the police and schools occupy the same room and share information about cases so they can react quicker when there are concerns.
Amy Weir, independent Chair of Coventry Safeguarding Children Board, said they were "very disappointed" with the Ofsted judgement.
"We are determined to tackle the further challenges raised in the report in order to deliver rapid improvement over the coming months," she said.
A Department for Education statement said it had been concerned about the arrangements for the protection of children in Coventry since the publication of the serious case review into Daniel's death.
"While we accept securing sustainable improvement takes time, today's report shows that the pace of change in Coventry has simply not been good enough," it said.
"We will now consider what further actions are needed to ensure all vulnerable children in Coventry are sufficiently protected."
Dr Bernard Gallagher, a specialist in child protection research at the University of Huddersfield, said society needed to be "more questioning" of families.
"If some parents are then suspected of abusing their children wrongly - that unfortunately is just something we have to accept," he added.
The director of children's services at charity Action for Children, Carol Iddon, said: "The services that need to be maintained and invested in are the ones of early intervention so that children get support earlier before they become critical and before the situation becomes necessary for social work intervention.
"We could do more at an earlier stage and that would then release social workers to deal with the high level cases where there are real genuine concerns about children's safety."
Children's services in Coventry - in the spotlight since four-year-old Daniel Pelka's death - have been branded "inadequate" by Ofsted.