The regulator's annual report highlights concerns around funding and capacity within the sector and stresses the risk of children of less well-off parents missing out.
It notes that while the number of children aged four or under has increased by 240,000 since 2009, the number of early years places has declined by 50,000.
"The government, local authorities and providers must plan further to ensure that enough funded places are available," Ofsted's Annual Report 2015/16 states.
"They need to make sure the children of parents who cannot afford to supplement the funding do not miss out.
"This extended provision has the potential to further narrow the gap for disadvantaged children, providing there is capacity in the system to deliver it."
Purnima Tanuku, chief executive of the National Day Nurseries Association called on government to take note of the report.
"Nurseries need to be properly funded to continue delivering high-quality childcare that all our children need to fulfil their potential," she said.
"Having been the chief inspector for five years, Sir Michael is well placed to understand the pressures that the nursery sector is under at the moment.
"These include chronic underfunding of 'free' childcare entitlement which is set to double next year, the recruitment crisis caused in part by stringent qualifications requirements for Level 3 practitioners and increased business costs such as the National Living Wage and rising business rates.
"The government must respond to these issues, ahead of the free entitlement increasing from 15 to 30 hours per week for three- and four-year-olds in September."
Neil Leitch, chief executive of the Pre-school Learning Alliance, said: "We share Ofsted's concerns about the lack of capacity in the early years sector. At a time when the need for childcare places is at its highest, we continue to see providers - and particularly childminders - exit the sector.
"If this continues, it is likely that many families across the country will find it increasingly difficult to find and secure childcare places.
"With so many providers warning that they will not be able to remain sustainable unless funding levels improve, we hope this acts as a stark warning to government. Neither they, providers nor parents can afford for this trend to continue."
More broadly, the report found that the quality of early years provision continues to rise. Between 2012 and 2016, Ofsted completed more than 80,000 inspections of early years registered providers.
A total of 91 per cent of all active early years providers are now good or outstanding, an increase of 22 percentage points since 2010 when the figure was 69 per cent.
Leitch said the report shows that the quality of early years provision is continuing to develop and improve, "despite the continued lack of financial and practical support facing many providers".
"We're particularly pleased to see that the gap between the quality of private voluntary and independent (PVI) provision in the most and least disadvantaged areas of the country is narrowing sharply, particularly for group settings, with overall quality at a record high," he said.
"For far too long, there has been a false yet persistent perception of PVI providers as being of generally 'low quality', despite the fact that 91 per cent of such providers are now rated as 'good' or better.
"As such, at a time when there has been much focus on ensuring the financial stability of the 400 maintained nursery schools in England, this report serves as an important reminder of the 50,000 PVI providers currently providing 'good' or 'outstanding' early years education and care to thousands of children across the country."