Mostly seen in children, it has been described as a stage beyond profound depression where individuals gradually withdraw from life and become catatonic.
The report said "at least 30 children on Nauru currently experiencing symptoms of trauma withdrawal syndrome" but "some staff members and clients on Nauru are reporting significantly higher numbers".
SBS News talked with psychiatry expert Louise Newman of the University of Melbourne, who contributed to the report.
Ms Newman said there is an "epidemic" of trauma withdrawal syndrome among children on Nauru.
She said it has been a relatively new phenomenon on the island and a "marker" of "just how traumatic it's become there".
"Some of these families have been there for five years... So many of these children are reaching a point where they're not able to cope with this situation."
She said "trauma withdrawal syndrome is almost like a stage of hibernation" for children, triggered when "the world has become too unsafe and too hopeless".
"When hopelessness and helplessness sets in across a whole group, we start to see the potential for these sorts of deteriorating conditions so that can move very quickly, which is what we've been witnessing... It's become intolerable so they shut down."
Source: Magnus Wennman, World Press Photo / AAP
She said physical health complications can include organ failure and brain damage, making it "a very serious medical emergency".
The report said, "these children cannot recover on Nauru because Nauru is the cause of the trauma".
SBS News contacted the Department Home Affairs about the report and what kind of support services are offered on the island.
In a statement, the department said it "takes seriously its role in supporting the Government of Nauru to ensure that children are protected from abuse, neglect or exploitation".
"A range of care, welfare and support arrangements are in place to provide for the needs of children and young people. Service providers are contracted to provide age-appropriate health, education, recreational, wellbeing and cultural services and activities," it said.
"Health professionals regularly engage with refugees and asylum seekers in regards to their mental health and individuals have access to counselling services as needed.
"When a person cannot receive appropriate treatment for a significant health condition in Nauru, the person is offered treatment in Taiwan, Papua New Guinea or Australia."
Australia's offshore policy is designed to deter people from embarking on treacherous sea journeys, with the department recently reiterating that "the Australian Government's position has not changed, these individuals will never come to Australia".