Materazzi was also handed a two-match suspension and fined more than A$5,200.
Zidane’s surprise headbutt on Materazzi in the World Cup final, followed a taunting by the Italian on the French captain and shocked football fans around the globe.
Zidane who has retired from international and club football after the World Cup, was also ordered to do voluntary work mentoring young people.
"As Zidane has retired, the commission has noted Zidane will also make himself available to FIFA for humanitarian activities with children and adolescents," said FIFA spokesman Andreas Herren said in a statement.
The iconic French midfielder was sent off near the end of extra-time in the World Cup final, which Italy eventually won on penalties, following a 1-1 draw in Berlin on July 9.
Zidane has since explained the incident by saying Materazzi insulted his mother and sister while the Italian has denied he made racist comments.
French Football Federation president Jean-Pierre Escalettes, who accompanied Zidane to the hearing, said the two players' testimony differed mainly over the "degree of the insult".
"It involved insults, as we've read in the press, regarding the mother and the sister of Zinedine Zidane," Mr Escalettes told reporters.
"On this point, they were not at all in agreement, the Italian player declaring that it involved only the sister and Zinedine was adamant in saying that there were insults towards his mother."
Zidane had listened intently while a FIFA official read out Materazzi's deposition and agreed with most of his declaration, Mr Escalettes said.
"The Italian apologised and admitted making the insults in a deliberate fashion," he added.
Gazzetta dello Sport previously quoted Materazzi saying the insults were not racist, religious, or political and denying that he had said anything about Zidane's mother.
Italian Football Federation commissioner Guido Rossi said the Italians would respect the FIFA verdict while intimating that Zidane was the chief offender.
"The episode is still serious because of the televised images and was brought to the attention of public opinion around the world," he said.
The punishment of Materazzi will have more effect than Zidane's as it means he will miss a World Cup final rematch against France in a Euro 2008 qualifier on September 6 in Paris.