Afghanistan's Independent Election Commission must still certify the U.N. watchdog's results. If it does, a runoff between Karzai and second-place contender Abdullah Abdullah must take place two weeks from the point the results are certified.
The ECC said it found "clear and convincing evidence of fraud" at 210 polling stations, which were across the country.
It was not immediately clear whether the findings meant there should be a second round of voting, according to news agencies.
"Now that we have the ECC (U.N.-backed Election Complaints Commission) orders, we expect IEC (Independent Election Commission) to implement those orders with haste and move swiftly to issue the final certified results or the need for a runoff as required by Afghan electoral law," said Aleem Siddique, a spokesman for the United Nations in Kabul, quoted Reuters.
After the Aug. 20 vote, the Afghan election commission declared Karzai the winner with 54.6 percent of the vote.
But widespread allegations of election fraud led the U.N.-backed Electoral Complaints Commission to toss out about 7 percent of the ballots, giving Karzai just 47 percent of the total vote, according to Western diplomats, the Washington Post reported.
Karzai has warned against a second round of voting, and his campaign has contended that the recount process is being "politically manipulated" by outsiders, according to the Times Online.
"The ECC is pretty much controlled by foreigners, and its foreign commissioners intervene in the process," said Maeen Mirstyal, a lawmaker and chief advisor to the Karzai campaign, quoted the Times Online. The commission has denied the charge.
The five-member panel is made up of two Afghans and three non-Afghan members appointed by the special representative of the Secretary-General of the United Nations.
Abdullah has said he would accept the ECC decision if all fraud had been properly investigated, according to Reuters.
A number of foreign officials traveled to Afghanistan's capital Kabul ahead of the Election Complaints Commission's announcement, including U.S. Sen. John Kerry, D-Mass., and French Foreign minister Bernard Kouchner.
Former U.S. Ambassador to Afghanistan Zalmay Khalilzad also was in Kabul on a private visit, the U.S. Embassy said.
Karzai's office said he spoke by telephone to Secretary of State Hillary Clinton, U.N. Secretary-General Ban Ki-moon, British Prime Minister Gordon brown and Pakistani President Asif Ali Zardari, Reuters reported.
The allegations of fraud have undermined Karzai's credibility and appeared to complicate President Barack Obama's decision on whether to send more U.S. troops to fight the Taliban.
Rahm Emanuel, the White House chief of staff, said Sunday on CNN that the U.S. administration could not make a decision about a request for 40,000 troops without a credible government in place in Kabul.
Emanuel said the question on Afghanistan was not about "how many troops you send, but do you have a credible Afghan partner for this process that can provide the security and the type of services that the Afghan people need?"
---- Compiled from wire reports and other media sources