The ministry said the sanction will take effect from Saturday and a transition team will take over PSSI's duties, as the association had failed to respond to three warning letters from the ministry.
"PSSI was clearly proven to have ignored and violated the government policy through those warning letters," the ministry said in a statement.
The ministry and PSSI have been at loggerheads for weeks over the eligibility of two clubs to compete in the Indonesia Super League.
The Indonesian Professional Sports Agency (BOPI), sanctioned by the ministry, wanted Persebaya Surabaya and Arema Indonesia to be blocked from playing, but PSSI had resisted.
FIFA had threatened the country with a ban over BOPI's meddling in their affairs and said only the PSSI was recognised to make decisions.
The world governing body takes a dim view of government interference in football affairs and a ban could prevent Indonesia from participating in the qualifying tournaments for the 2018 World Cup and 2019 Asian Cup.
As a result of the dispute, the Indonesia Super League, which kicked off on April 4, was suspended after just two games, prompting FIFA to ask the minister of youth and sports to stop meddling in the running of the local football league.
"We will communicate with FIFA about this issue. We won't be surprised if FIFA has a different view on this," Gatot Dewa Broto, an official at the ministry, told Reuters.
(Reporting by Chris Nusatya; Writing by Eveline Danubrata; editing by Sudipto Ganguly)
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