The ban, which takes effect immediately, means Indonesia will not be eligible to compete in the next round of qualifiers for the 2018 World Cup and 2019 Asian Cup, starting in less than two weeks.
However FIFA did allow Indonesia's national team to play at the Southeast Asian Games in Singapore because the tournament has already started.
FIFA took action against Indonesia following a row between local government and the football association which has resulted in the cancellation of the domestic competition.
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"The Executive decided to suspend the Indonesia Football Association (PSSI) with immediate effect and until the PSSI would be able to comply with its obligations under arts. 13 and 17 of the FIFA Statutes," FIFA announced on Saturday.
"This decision resulted from the effective "take over" of the activities of PSSI by the Indonesian authorities.
"However, and as an exceptional measure, the national team would be allowed to continue their current participation in the 2015 Southeast Asian Games."
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