A Home Affairs Committee report called for a change in the law so that police cells were no longer deemed a “place of safety” under the Mental Health Act.
About 6,000 adults and 200 children with mental health issues were detained in police cells last year because of a shortage of space in NHS hospitals.
Home Secretary Theresa May said the government was reducing the numbers.
Currently, people detained under section 136 of the Mental Health Act 1983 can be held in a hospital or police station for up to 72 hours.
Police have been forced to “fill the gap” because of a lack of NHS facilities, the chairman of the cross-party committee, Labour’s Keith Vaz, said.
He called for the detention of children with mental health issues in police cells to “cease immediately”.
Last year 236 children were detained in a police cell under the law.
“These people are not criminals, they are ill and often are experiencing a great deal of trauma,” he said.
He said in many cases detentions acted as the “starting point” for those who were mentally ill to enter the criminal justice system – often ending in prison.
Mrs May said she had “always been clear that people experiencing a mental health crisis should receive care and support rather than being held in a police cell”.
She said reforms were “already bearing fruit”, with 22% fewer people held in cells under the Mental Health Act in 2013/14 than in the previous 12 months.
But the Police Federation of England and Wales said ministers must “do more” to ensure mental health patients were treated by the NHS “instead of leaving it to police officers”.
Doug Campbell, mental health lead for the federation, said: “Just as you would not expect a doctor to run a complex police investigation, police officers can never be an adequate replacement for medical staff.”
The report comes after a mentally ill teenager was held in a cell for two days last year due to a lack of hospital beds.
Her mother said the 16-year-old girl had suffered “heartbreaking” failings in her care.
NHS England later apologised and described her care as “unacceptable”.
The case sparked an outcry and debates in Parliament, leading to Home Secretary Theresa May announcing an overhaul of mental health laws in England and Wales.
Care minister Norman Lamb, who has spoken out about the issue in the past, said real progress had already been made, and added that “in many parts of the country it’s now a thing of the past”.
Local authorities in England have pledged to ban the practice.