Sport Ireland is to immediately suspend and withhold funding to the FAI.
The statutory authority said it has made the decision after the FAI said they "did not comply with Clause 4.3 of Sport Ireland’s Terms & Conditions of Grant Approval."
The board of Sport Ireland met earlier to discuss the ongoing controversy over a €100,000 "bridging loan" given to the FAI in 2017 by former CEO and now Executive Vice President, John Delaney.
Sport Ireland said that in making its decision to suspend and withhold funding "the Board of Sport Ireland notes that the FAI has already been paid 50% of its 2019 funding to date and some positive steps taken by the FAI in recent days."
Sport Ireland said the decision will be reviewed by the board "as a standing item at each of its future meetings".
The board said it will consider reinstatement of funding "once all ongoing reports commissioned by the FAI have been completed and the recommendations adopted".
Sport Ireland said it would continue to provide non-financial assistance and guidance to the FAI.
A statement from FAI President Donal Conway said that Irish football's governing body has noted the decision.
"It is unfortunate that Sport Ireland now feel compelled to take this action in the wake of recent events," the statement read.
"The €2.7million funding Sport Ireland provides annually to the FAI is crucial to the development of an inclusive approach to football in Ireland.
"As indicated at its meeting with Sport Ireland last Friday and in recent correspondence, the Association is keen to restore trust and confidence and rebuild the relationship with Sport Ireland as soon as possible."
The statement said the FAI "has committed to take all appropriate steps in this regard."
Mr Conway added: "I am fully confident that through the processes now in place, we will be in a position to satisfy Sport Ireland in relation to both governance and financial issues and ensure that the 50% balance of funding due for 2019 is restored at the appropriate time."
Yesterday the football association admitted to breaking the rules for getting State funding by not notifying Sport Ireland of the €100,000 loan from its former CEO John Delaney.
“Certain circumstances arose in April 2017 were not reported to Sport Ireland,” admitted the association, adding that it will work to establish “a process to ensure the FAI are, in future, fully compliant”.
The admission is included in remarks from the FAI president, Donal Conway, which will be made to the Oireachtas sport committee.
The FAI has also acknowledged inaccuracies in its initial public response about the controversial payment after it was disclosed last month.
Representatives from the FAI are due before the Oireachtas Sport Committee tomorrow.
Committee chair Fergus O'Dowd says members will focus on governance at the FAI.
"Well, that's what our committee is about. To go into all of the issues in relation to the governance of the FAI," said Mr O'Dowd.
"In relation to the €100,000 payment - the governance issues around that - and the knowledge that the board had or didn't have of that information.
"It will be a fair, it will be a frank, it will be obviously a very robust debate."