Ofsted downgraded Darul Hadis Latifiah in Bethnal Green, saying pupils were not being "prepared for life in modern Britain".
Inspectors found "grimy" facilities and "inappropriate" literature.
The school, for boys aged 11 to 20, said it was "preparing a formal complaint" in response. It said the camera only viewed the "washing area".
Ofsted reported a CCTV camera was found "in the communal area of the toilets" and displayed images in "plain view" of the reception area.
Changing rooms and showers were labelled "grimy and disgusting" after mouse droppings and sharp metal were found on the floor.
During a two-and-a-half day inspection in October a book was found in the school library which "promoted inappropriate views of how girls and women should behave".
School leaders said they were "unaware" of the book's presence, but claimed the book referred to the belief women should "dress modestly".
Ofsted concluded "there are too few opportunities to learn about women in modern society" at the school.
Very few pupils were able to name "the new British prime minister or were aware of the first female presidential candidate in the elections taking place in the United States of America" during the inspection.
Respect for women was taught, but was limited "to the roles of motherhood and families" during Islamic studies, the report added.
Some pupils told the inspector that if they asked questions about sex and relationships they would get a detention.
Inspectors concluded the government's flagship counter-terrorism strategy was not being implemented at the school.
Failing to identify any risks to pupils in line with the government's "Prevent strategy" left pupils "exposed to being drawn into situations which put them at risk of harm", Ofsted concluded.
Badrul Islam, secretary to the school's governing board, said the school did "not accept most of the findings".
"We know our whole mission is to prepare our pupils for life in British society as good British Muslims".
An independent Islamic boys' school where inspectors found a CCTV camera in toilets has been rated "inadequate".