Sinn Fein could face penalties of more than £500,000 a year, following accusations the IRA was behind the Northern Bank robbery in Belfast.
Paul Murphy addressed the House of Commons on Tuesday
Northern Ireland Secretary Paul Murphy wants parliamentary allowances for the four Sinn Fein MPs to be removed.
He has given the party until next Tuesday to defend itself before a final vote is taken on the sanctions.
Sinn Fein's Alex Maskey said his party had no links to crime and called the move "a distortion of democracy".
Mr Murphy also confirmed a ban on Sinn Fein's £120,000 Stormont assembly grant for earlier IRA crime, is to be extended for another 12 months.
Michael McDowell, the Irish justice minister, had named Gerry Adams, Martin McGuinness and Martin Ferris - a Sinn Fein MP in the Dail - as being among the IRA's Army Council.
Mr Murphy said he would not name individuals, but "agreed entirely" about links between Sinn Fein and the paramilitary group.
A report by the Independent Monitoring Commission, which monitors paramilitary activity, last month recommended imposing financial penalties on Sinn Fein.
It backed the police assertion the IRA was behind the £26.5m raid at the Belfast headquarters of Northern Bank on 20 December - a claim the IRA denies.
Mr Murphy told the Commons the report had concluded the Provisional IRA had "planned and undertaken" the bank raid as well as three other major robberies last year.
Mr Murphy said he understood why some believed sanctions were not tough enough, but he rejected calls to exclude Sinn Fein from the political process, saying the move would not deliver "long-term stability".
But he said the decision would have been "very different" had the assembly not been suspended.
Addressing calls for the assembly to be reconvened and then action taken to exclude Sinn Fein, he said: "I have not ruled anything in or out."
The £120,000 sanction would come into effect on 29 April, the day after an existing sanction expires.
Irish Prime Minister Bertie Ahern said he agreed with the British government's decision not to leave Sinn Fein out of the political process.
"I welcome what Paul Murphy said today," he said.
"The British clearly believe that inclusive means is the only way and isolationism is not the way."
Criticising the sanctions, former Belfast Lord Mayor Alex Maskey said Mr Murphy "has no right to discriminate against democratically elected Irish politicians".
More than £26m was stolen from the Northern Bank
"We will continue to fight this discrimination politically, legally and through an ongoing campaign of democratic resistance."
But the move was backed by DUP leader Ian Paisley.
"The time has come for this government and this House to set its own affairs in order and say there is no place in a democracy for armed terrorists and for their campaign of crime and their campaign against the decent citizens of Northern Ireland."
UUP leader David Trimble said he wanted more stringent sanctions.
However, the SDLP's Seamus Mallon said: "The IRA and Sinn Fein thrive on victimhood and grievances. This House should not facilitate them by handing them any more."
Shadow Northern Ireland secretary David Liddington backed the sanctions and called for Sinn Fein to be excluded.
Lembit Opik, for the Liberal Democrats, said his party would support the move if the IRA was proved responsible for the Northern Bank robbery and other recent crimes.