More than 3.5 million over-65s experience mental health problems, but most of those with depression or dementia are not even diagnosed, according to an extensive inquiry into services.

The report reveals the alarming extent of illnesses, including schizophrenia, stress and alcohol abuse, predicting that by 2021, one in 15 Britons will be an older person suffering a mental health problem.

But the report warns that services are already failing people. Only one in seven of those with depression are diagnosed and treated and fewer than half of those with dementia have it identified, concludes an independent inquiry into mental health and wellbeing in later life. The work was supported by Age Concern.

It says there is a resounding silence about the "tremendous unmet need" among older people, adding: "Age discrimination remains the fundamental problem ... The majority of older people with mental health problems do not receive services."

The report also unveils the knock-on effects of such illness on others. One in three providers of unpaid care for older dementia sufferers have depression.

The report comes a week after a health minister admitted about 600,000 dementia sufferers are being let down by the NHS and local social services. Ivan Lewis promised a new strategy to improve services by next summer, increasing awareness of the illness and providing earlier diagnosis and better treatment. The issue is rising up the political agenda because increased longevity will double the number of sufferers over the next 30 years.

The review finds that direct age discrimination, such as age barriers to accessing services, can have a devastating effect on people's mental health.

But ageist attitudes are also to blame, leading people to assume, wrongly, that it is inevitable older people will be depressed, or that little can be done to help those diagnosed with dementia.

The research finds that one in four people over 65 have depression or serious symptoms of depression - and one in five people over 80 suffer dementia. Over 65s have the highest suicide rate of any age group.

But without improvements in health care policy and practice, there will be 3.5 million older people with symptoms of depression and nearly 1 million with dementia by 2021. The report makes 35 recommendations for improving mental health services for older people.

June Crown, chairman of the four-year UK Inquiry into Mental Health and Well-Being in Later Life, said: "Mental health problems in later life are not an inevitable part of ageing. They are often preventable and treatable, and action to improve the lives of older people who experience mental health difficulties is long overdue."