The Electoral Commission is to appeal against a ruling that UKIP should forfeit only a fraction of £367,697 it received in "impermissible donations".
The party faced having to repay more than £367,000
Earlier this month a district judge ruled the party should pay back £18,481 - but found the breach was accidental.
But the Electoral Commission said it was disappointed and was appealing in order to clarify the law on donations.
Most of the money had been donated by retired bookmaker Alan Bown, at a time when he was not on the electoral roll.
The UK Independence Party had feared financial ruin if it was forced to hand back all the donations.
Mr Bown donated £363,697 between December 2004 and January 2006.
A further £4,000 was donated by the firm Nightech, but because it is registered on the Isle of Man it was considered a foreign donation and therefore impermissible.
UKIP, which has nine MEPs, admitted breaking the law but said it was due to a clerical error.
But in a statement on Tuesday, the Electoral Commission said it had lodged an appeal against the ruling.
"We are disappointed that the court did not order forfeiture of all the donations in question which, by UKIP's own admission, were impermissible," it said.
"As it is the first time that the law on forfeiture of impermissible donations has been tested in court, we believe it is important to clarify the law in this area.
"We will continue to intervene when parties haven't complied with the law, to ensure public confidence in the integrity of the democratic process."
Westminster Magistrates Court heard earlier in August that Mr Bown had been on the electoral register in Thanet, Kent, but was removed without his knowledge in December 2004.
The businessman did not find out until December 2005 and was reinstated the following February.
The judge said it was "clear Mr Bown had been entitled to be on the electoral register" but that UKIP had not taken all "reasonable steps" to confirm this when accepting his money.
UKIP leader Nigel Farage MEP said the Electoral Commission decision was "purely vindictive" and "a waste of tax payers money".
"They completely overreacted in the first place and now they are seeking to dig themselves an even bigger hole by refusing to admit their mistakes," he said.