The so-called "Team 8" was appointed by President Susilo Bambang Yudhoyono to look into allegations that police and prosecutors are trying to frame top anti-corruption investigators with false criminal charges.
The scandal has sparked protests and raised doubts over Yudhoyono's drive to lift the scourge of corruption from Indonesia, which remains ridden with graft despite 10 years of reform since the fall of the Suharto kleptocracy.
"Team 8 recommends to the president, in order to uphold justice for the people, that sanctions should be imposed on the officials responsible for this forced legal process," team spokesman Anies Baswedan told reporters after the committee handed in its report at the end of a two-week investigation.
It also said the police had no evidence to support their allegations of bribery and abuse of power against two deputy chairman of the Corruption Eradication Commission (KPK), and recommended the charges be dropped.
Yudhoyono has been under mounting pressure to take action after wiretap recordings captured senior police and prosecutors discussing ways to apparently frame the commissioners, Chandra Hamzah and Bibit Samad Riyanto.
The anti-graft investigators were arrested last month but were released after the KPK's wiretaps were played in court on November 3.
Police general Susno Duadji and deputy attorney general Abdul Hakim Ritonga have stepped down over their roles in the alleged conspiracy, but anti-graft activists say police chief Bambang Hendarso Danuri and Attorney General Hendarman Supandji also must go.
The team also recommended authorities investigate a controversial, 6.7-trillion-rupiah (US$710-million) bank bailout many analysts believe is the source of friction between the police and the KPK.
Baswedan said Duadji's connections with an account holder reportedly close to Yudhoyono's Democratic Party who was able to withdraw supposedly frozen funds from the collapsed Bank Century should be part of the wider probe.
The Democrats have refused to back parliamentary calls for an inquiry into the Bank Century fiasco, arguing that any suspicions over the bailout should be investigated by the police and not by lawmakers.
Yudhoyono welcomed the Team 8 report but insisted he could not immediately act on its recommendations due to an "internal process" that he did not explain.
"As the head of the country and head of government, what I do will have to be in line with the constitutional order, laws, and government rules," he said, echoing his standard line that the "legal process" must be respected.
Police have refused to drop their allegations against the KPK officials despite the attorney general's office twice rejecting the case in the aftermath of the wiretap revelations.
Activists said Yudhoyono, a liberal ex-general who won re-election in July on promises of clean government and economic growth, was under mounting pressure to prove his anti-corruption credentials.
"The president must follow the recommendations of the team, otherwise what's the point in setting it up in the first place?" Indonesia Corruption Watch coordinator Danang Widoyoko told AFP.
"If he doesn't follow the team's recommendations, it will mean that he has not only failed in carrying out his job as president but also in stopping corruption. In fact, he's only encouraging corruption."