Sixteen passengers and crew were hurt in the January 2011 incident, when the first officer rammed the control stick forward to avoid a U.S. plane he wrongly thought was heading straight toward him.
"Under the effects of significant sleep inertia (when performance and situational awareness are degraded immediately after waking up), the first officer perceived the oncoming aircraft as being on a collision course and began a descent to avoid it," Canada's Transportation Safety Board said.
"This occurrence underscores the challenge of managing fatigue on the flight deck," said chief investigator Jon Lee.
The incident occurred at night on board a Boeing 767 twin engine passenger plane flying from Toronto to Zurich in Switzerland with 95 passengers and eight crew.
The report said the first officer had just woken up, disoriented, from a long nap, when he learned from the pilot that a U.S. cargo plane was flying toward them.
"The FO (First Officer) initially mistook the planet Venus for an aircraft but the captain advised again that the target was at the 12 o'clock position (straight ahead) and 1,000 feet (305 meters) below," said the report.
"When the FO saw the oncoming aircraft, the FO interpreted its position as being above and descending towards them. The FO reacted to the perceived imminent collision by pushing forward on the control column," the report continued.
The airliner dropped about 400 feet before the captain pulled back on the control column. Fourteen passengers and two crew were hurt, and seven needed hospital treatment. None were wearing seat belts, even though the seat-belt sign was on.
The safety board said the crew did not fully understand the risks of tiredness during night flights.
The first officer, whose young children often interrupted his sleep at home, had napped for 75 minutes rather than the 40-minute maximum laid down by airline regulations. This meant he fell into a deep sleep and was disoriented when he woke up.
The report is yet another problem for Canada's largest airline, which has faced prolonged labour unrest.
Air Canada, expressing regret that passengers were injured, said it had taken steps to prevent a recurrence, reminding pilots to follow the rules for napping during flights and increasing efforts to heighten crews' awareness of fatigue and its effects.
"Air Canada has developed a special fatigue report form for use in its safety reporting system ... this enhanced system should be in place in summer of 2012," said spokesman Peter Fitzpatrick.
The Air Canada Pilots Association has long pressured authorities to take the stresses of night flying into account when setting the maximum hours a pilot can work. Canada's regulations were last changed in 1996, when the longest duty day was cut to 14 hours from 15 hours.
"The current regulations are not sensitive at all to the time of day ... (North Atlantic flights) are certainly fatiguing in comparison to most other flying," said association president Paul Strachan.
He also said Air Canada operated trans-Atlantic flights with two pilots whereas U.S. carriers used three to share the load.
"The regulator will have done a risk assessment and obviously is satisfied ... that the risk was acceptable, but obviously it is an increase, there is no two ways about it," he said.
The full TSB report is at http://www.tsb.gc.ca/eng/rapports-reports/aviation/2011/a11f0012/a11f0012.asp