A special government commission issued a report in London last night urging the British government to recognize the decline in Britain's power and influence and to make unprecedented cuts in its diplomatic service.

The report said poor economic performance has lessened Britain's standing in the world, and "there is very little that diplomatic activity and international public relations can do to disguise this fact."

Twenty embassies and high commissions and 35 consulates will be closed or sharply reduced if the report's recommendations are accepted. Among principal targets for cutbacks would be the big embassy staffs in such major capitals as Washington, Bonn and Paris.

Objections to the report were raised immediately by embassy staff members in Washington, who noted that the embassy here is the one that everyone of importance in government, including royalty, insists on visiting.

Most visitors stay at the embassy, they said, and most have almost every wish gratified. Seven ministers, the opposition leader and two members of the royal family have already announced their intention to visit Washington during September and October.

The report was issued by a seven member government sponsored "think tank" - formally, the Central Policy Review Staff - headed by Sir Kenneth Berrill, an economist. It calls for sweeping reorganiztion of the foreign service, with greater use of civil service specialists sent out from Britain on spot assignments, and greater emphasis on Britain's economic interests.

The report is certain to stir up controversy and to be the subject of extended debate. Technically, a diplomatic source in Washington said, the decision on acceptance will be made by the foreign minister, but since many ministries will be affected it will in fact be made by the entire Cabinet.

With Parliament in recess, it is unlikely that decisions will be made for many months. Parliament will reconvene in late September, and it is certain to debate on the commission's recommendations at length before the Cabinet acts.

Among the controversial proposals certain to draw opposition from the Foreign Office is the suggestion that civil servants with specialist knowledge and experience in domestic governmental departments replace many career diplomats overseas.

This switch, the 442-page report said, might be achieved by merging the diplomatic service with the civil service and creating a combined foreign service group to fill posts connected with overseas representation, not only abroad but in London ministries such as the Trade Department.

The report advocated extensive cuts in information services, including the overseas programs of the BBC, in the number of defense attaches and in consular activity, mainly in Western Europe.

The commission proposed the abolition of the British Council, which promotes educational and cultural work abroad.

The report noted that the British share of world trade in manufactured goods had fallen by more than a half in the last 20 years, and went on: "Inevitably, therefore, the United Kingdom's ability to influence events in the world had declined."

In addition, it said, the European Common Market had added an overseas dimension to many British departments that had previously been almost entirely domestic in character, and it urged that Britain seek to influence world events primarily by influencing the policy of the nine-nation Common Market.

In arguing that Britain needs fewer full-time resident representatives in developed countries, the report focused on major installations like the one in Washington. The embassy here, with its staff of 570, was described by one source as "a little Whitehall."

Only 17 of the staff members are professional foreign service, however, and their time, is also required in planning for the flood of visitors and taking care of visitors once they are here.

Two members of the diplomatic staff worked full-time on preparations for the Queen's Bicentennial visit last year.