He said: "The emphasis is – too much in my view – on fixing families."
Describing a case dealt with by Barnardo's, where children with rotten teeth and poor school attendance had been removed from their "scandalously neglectful" family and had begun to improve in foster care, Mr Narey said: "The whole direction of statutory and voluntary sector effort, it seemed to me, was directed to seeing whether this family could be fixed.
"In time, that would probably involve the children returning to a home which might, if not immediately, once again descend into inadequacy and neglect. Why would we want to take that risk?"
Referring to Baby P and Shannon Matthews, he went on: "Long before the revelations around these two children I have wondered whether we need fundamentally to reassess our approach to care and to residential care in particular."
Mr Narey, a former director general of the Prison Service who left government to run Barnardo's in 2005, said local councils and charities tended to regard placing a child in care as "the worst possible choice for any child", particularly if the youngster was heading for a residential home rather than foster care.
He called for a fresh look at the way children's homes are set up and financed. "It cannot be beyond us to provide high quality residential care," he said. "Indeed – to add to my heresies in this paper – I have seen such care provided in the UK by the private sector."
Welcoming the remarks, Michael Gove, the shadow children's secretary, said: "I think after Baby P a change is now going on, where people do realise that the interests of the child are paramount. It is not good enough to leave children in circumstances, with the birth parents, where that child could be at risk of abuse.
"Foster parents do a fantastic job but we do need to look seriously at other care options. I am not saying that residential care is the right answer in all circumstances, but we do need to give consideration to improving it because we cannot leave children like Baby P in places where they face significant risks."
However, John Hemming, the Liberal Democrat MP and chairman of Justice for Families, pointed to data from the Department for Children, Schools and Families which showed that among 7,800 children taken into care in 2006, only 1,800 had been returned to their families by March 2007.
"I'm not sure Mr Narey really understands what is going on. Nor am I sure that he has the practical experience," said Mr Hemming.
"His basic assertion that more children need to be taken into care and fewer need to be returned to their families ignores the statistics."
Harry Fletcher, assistant general secretary of the union for family court staff, Napo, disagreed with Mr Narey's suggestion that more children should be taken into residential care.
"Barnardo's have a vested interest in residential homes because they run some of them," he said. "All the evidence suggests residential care should be used as little as possible because the experience is damaging."
Baby P, who was 17 months old, died in August 2007 after suffering more than 50 injuries while living with his mother, 27, her boyfriend, 32, and their lodger Jason Owen, 36, despite being on the "at risk" register and receiving 60 visits from health and social workers.
Karen Matthews, the mother of Shannon, was jailed for eight years last week along with the child's uncle Michael Donovan for kidnapping the youngster, then aged nine, for £50,000 in reward money, raising further questions about the way the family had been handled by social workers.
Wes Cuell, director of children's services at the NSPCC, broadly agreed with Mr Narey's assessment.
He said: "We should not be keeping children out of care just because we don't like what care represents.
"If children need to be in care, they should be, and we should find the right sort of care for them which is not based on traditional beliefs about care based in families.
Ian Johnston, chief executive of the British Association of Social Workers, said: "Martin is right to say that we need to look at things differently. I would like to think that most social workers will look at all the possibilities."