The Evening News has obtained a damning Care Commission report that slammed the city council for "not meeting its duty of care" at the council-run Oxgangs Young People's Centre following an inspection last year.
It followed a complaint by a local resident after children from the Oxgangs Avenue facility stole a car, set fire to it then lit bushes in neighbouring gardens.
The report revealed a catalogue of problems at the centre, which provides accommodation for up to eight young people between the ages of 12 and 18 who cannot be accommodated safely in their family home.
Staff interviewed by Care Commission officers said they could not control the youngsters and that they did not feel safe at work.
They also said there had been a series of incidents, including vandalism, theft, arson, assault, threatening behaviour, bullying and "sexualised behaviour".
In the report, Val Turnbull, team manager for the south-east region of the Care Commission, said: "The (Care Commission] officers questioned the viability of the home in these circumstances and assessed that, without action from external managers, there was potential for significant risk of harm to the young people, staff, neighbours and the community.
"It was clear that the young people were outwith the control of the staff and the service provider's capacity to discharge its duty of care to the young people in these circumstances was compromised."
The report was compiled following a complaint by a local resident after the theft and arson incidents, which happened at the nearby Pentland Gardens in June 2009. One Pentland Gardens resident, who did not want to be named, said: "The police are never away from the place. When something happens there, it happens big-style.
"Neighbours are concerned enough to have written to their councillors and MPs about it.
"I feel there's not any control. It has to be better managed."
The Care Commission instructed the council to employ additional "suitably experienced" staff to support the existing team, and to ensure that the number of staff per shift was increased, "so that young people resident in the unit can all be closely monitored and their needs met".
Two subsequent inspections have taken place since the damning report last summer and the Care Commission has said its requirements have been met.
In one report, in September 2009, it said: "The provider took immediate action to address this requirement, which was met within the timescale."
A full report on the second inspection, which took place earlier this year, has not yet been compiled.
A spokesman for the city council said: "We are committed to good community relations around our establishments.
"All of the Care Commission's recommendations were acted upon immediately and the two subsequent reports on the centre recognised this whilst praising management and leadership at the centre."