The European Banking Authority (EBA) said it had identified more than 70 risks related to trading in virtual currencies, including their vulnerability to crime and money laundering.
The London-based body in a statement advised European financial institutions against "buying, holding or selling virtual currencies while no regulatory regime is in place".
"A regulatory approach to address these risks would require a substantial body of regulation, some components of which would need to be developed in more detail," it added.
Virtual currencies, most famously Bitcoin, have come under increasing scrutiny by financial regulators as their popularity has grown.
Launched in 2009 by a mysterious computer guru, Bitcoin is a form of cryptography-based e-money that offers a largely anonymous payment system and can can be stored either virtually or on a user's hard drive.
Backers say virtual currencies allow for an efficient and anonymous way to store and transfer funds online.
But regulators argue the lack of legal framework governing the currency, the opaque way it is traded and its volatility make it dangerous.
Mt Gox, once the world's biggest Bitcoin exchange, filed for bankruptcy in Japan this year and at least 11 banks in its key market of China have stopped handling the currency.
Bitcoin's reputation was also damaged when US authorities seized tens of thousands as part of an investigation into dark Web bazaar Silk Road.
"We want investors to understand fully the magnitude of the risks attached to this currency," said Olivier Vigna, chief economist of France's market watchdog AMF.
Bitcoin prices surged to USD 1,240 in November last year before they crashed following moves by exchanges, financial institutions and the government to rein in the virtual currency.