European football's governing body said Malaga would be barred from taking part in either the Europa League or Champions League when they next qualify, and also faced the prospect of a second year-long exclusion if they failed to clear outstanding debts.
UEFA gave the Liga club a deadline of March 31 next year to prove it had “no overdue payables” to clubs, employees or the tax authorities.
If they were unable to do so, the ban would be extended, a statement on uefa.com said.
Malaga, who were also fined 300,000 euros ($396,000, 244,000 pounds), were on Thursday drawn to face Portuguese side Porto in the last 16 of the Champions League, giving the Spanish side a real chance of progressing to the quarter-finals.
But the club said they would appeal against the decision and claimed they were already proceeding with financial restructuring in line with UEFA'S fair play rules.
“Malaga football club wishes to express its total disagreement with the resolution made today by UEFA, considering the measures it intends to take absolutely disproportionate and unjustified,” said a club statement.
“An unfair punishment is being applied to make an example of the club, turning it into a scapegoat.”
The club “will work energetically and tirelessly until justice is done, appealing firmly to all the necessary bodies.”
Malaga are currently fourth in La Liga behind leaders Barcelona, Atletico Madrid and Real Madrid, which would ordinarily allow them to qualify for a European spot.
Nine European clubs were referred to UEFA's financial regulators because of debt problems, as the ruling body seeks to clamp down on clubs spending beyond their means and target infringements of licensing agreements.
Five other clubs face one-year European bans should they qualify over the next three seasons. They are Croatian sides Hajduk Split and Osijek; Romanian clubs Dinamo Bucharest and Rapid Bucharest; and Partizan Belgrade of Serbia.
The clubs were given a March 31, 2013 deadline to prove they had honoured their debts and were fined amounts ranging from 80,000 euros to 100,000 euros.
Serbian side Vojvodina were fined 10,000 euros, Ukraine's Arsenal Kyiv received a 75,000-euro fine, 30,000 of which was suspended until it had proved it had paid its dues, while a case against Polish side Lech Poznan was dropped.
UEFA said in November that Malaga were among nine clubs facing sanctions over unpaid bills, although they lifted the suspension of prize money on 16 of 23 clubs originally targeted in September as part of their Fair Play controls.
Malaga spent nearly 60 million euros on new players last year but failed to meet a deadline to show they had cleared overdue payments.
The club is owned by Sheikh Abdallah Ben Nasser Al-Thani, a member of the Qatar ruling family.
UEFA are intending to introduce financial fair play rules to ensure that clubs in continental competition live within their means at the risk of penalties, including being banned from international tournaments.