A report by the disciplinary committee of world football's governing body found the IFA "failed to take meaningful action against Beitar Jerusalem" for "persistent and well-documented racist behaviour."
In October 2024, the Palestine Football Association reported allegations of discrimination by the IFA to FIFA, which initiated an investigation.
FIFA did not opt for the sanction requested by the Palestinian FA, which argued for a suspension of the IFA.
But the IFA was found to have failed to "abide by FIFA's statutory objectives," in a lengthy decision published by its disciplinary committee, which listed several racism incidents in Israeli football.
The disciplinary committee highlighted "deficient and substantively inadequate" sanctions against Israeli club Beitar for racist and discriminatory behaviour.
"Supporters have engaged in persistent and well-documented racist behaviour," the report said of Beitar fans.
"The club's use of slogans such as 'forever pure', and the repeated chanting of ethnic slurs such as 'terrorist' directed at Arab players are not isolated incidents but rather form part of a systemic pattern of conduct that offends the basic rules of decent behaviour and brings the sport into disrepute.
"The committee underlined that said club is only a small example of a general failure by the IFA."
IFA forced to display anti-discrimination banner
FIFA also said the IFA was issued with a warning and was ordered to display a "significant and highly visible banner" at its next three FIFA competition home matches, stating 'Football Unites the World - No to Discrimination'.
The IFA will have to invest one-third of the fine towards implementing a plan to "ensure action against discrimination and to prevent repeated incidents."
After a separate investigation, FIFA announced no action would be taken against the IFA over allegations that Israeli clubs based in the occupied West Bank were taking part in Israel's leagues.