Sport England has cut the FA's funding for grassroots football by £1.6m.
The national sport had been threatened with a reduction in funding after it failed to reach participation targets and the public body has revealed the extent of the cuts.
"Sport England is taking £1.6m away from the FA because the number of people playing football regularly - once a week, every week - has dropped sharply," read an official statement.
"Sport England will reinvest the £1.6m to create a grassroots 'City of Football' - working in one place to create a whole range of new opportunities to encourage more people to play football regularly and sharing the insight with the FA to help it grow the game. We will be inviting bids from interested cities in April."
And, speaking to Sky Sports News Sport England chief executive Jennie Price emphasised those involved at the lowest level of the sport would not lose out.
"I want to reassure people who play football that they will still get the benefit of this investment. It is the FA that's losing it, not the sport," she said.
"The reason we have taken the money away from the FA is that we believe they really need to look at some aspects of their plans to grow the game."
Grassroots cricket had also been threatened with a reduction in funding after it too failed to reach participation targets but appears to have escaped the cuts.
Sport England, who receive funding provided by the Government and the National Lottery, had warned sports they would not receive all of their 2014-2017 funding if they failed to hit their participation targets.
But there were plenty of other losers in the battle for funding, with golf losing £496,000.
Netball has lost £275,000, while rowing has also failed to meet its annual grassroots participation target and will now lose £236,000.
Hockey has also been punished and now misses out on £137,000 and mountaineering stands to lose £97,000.
Figures released by Sport England for the 12 months from October 2012 show that the number of over 16s participating in at least half an 30 minutes of football a week is down by 183,100 from a total of 2,021,700 in the same length period from October 2005.
Figures from the same parameters show that those involved in cricket fell by 46,900 from 148,300.
There were participation increases in both athletics (up 662,600 from 1,353,800) and cycling (up 368,200 from 1,634,800).
Any funds that are taken away from the two sports will be reassigned to a pool of money for which other successful sports can then bid.
Sport England give 46 sports half a billion pounds of government and lottery funding every four years to encourage greater participation in sport at a grassroots level.