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His Majesty's Inspectorate of Constabulary and Fire and Rescue Services (HMICFRS) said the county's service required "urgent improvements".
The performance of North Yorkshire Fire and Rescue Service (NYFRS) had "deteriorated in most areas" since its last similar inspection, it said.
NYFRS said it was "absolutely committed to making significant progress".
Following its latest inspection, HMICFRS described the service's financial position as "precarious" and its budget as "fragile".
Inspectors also found it did not always have the minimum number of fire engines it required "or staff with the required skills and capability".
An overall rating of "inadequate" was recorded for "efficiently keeping people safe and secure from fire and other risks", along with looking after its staff.
'Inadequate in how it looks after its people'
Other findings in the report included, in the year to 31 December 2021, Home Office data shows response times to primary fires was 11 minutes 39 seconds, a minute slower than average for predominantly rural fire services.
The service needed to improve the right values and culture, ensure fairness and promote diversity.
The service has improved how it prevents fires and other risks, partly through promoting fire safety messages.
NYFRS is “inadequate” at making best use of its resources.
It said it recognised the service had made some recent efficiencies, with opportunities for future savings or to generate further income described as “limited”.
The Watchdog said there was “little evidence” to show the benefits of NYFRS sharing some business services with police and the Police, Fire and Crime Commissioner’s office.
Roy Wilsher, His Majesty’s Inspector of Fire and Rescue Services said: "Although the service is good at preventing fires and other risks, I have concerns about its ability to respond to them.
"We have also highlighted serious concerns about how sustainable its financial plans are for managing these risks in an affordable way."
HMICFRS said it had been in regular contact with the fire service and "will be revisiting the service to monitor its progress".
Jonathan Dyson, NYFRS chief fire officer, said: "While this is a very disappointing outcome, it is not a reflection of the hard work and dedication that our staff show, every day, to keeping our communities safe and feeling safe.
"Since taking up my position in July 2022 I remain very aware about what needs to improve and I'm confident that we'll deliver the HMICFRS improvement plans and service transformation."
He added: "We are absolutely committed to making significant progress over the next two years."
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