Uefa says it could not take action against Rangers fans because their alleged sectarian singing had been tolerated for years in Scotland.
John McBeth says banning orders will be introduced
Rangers had been found not guilty of discriminatory chants during the Champions League games with Villarreal.
Uefa's statement said that "Billy Boys" had long been sung "without either the Scottish football or governmental authorities being able to intervene".
"The result is that this song is now somehow tolerated," it explained.
Rangers were fined just under £9,000 after a fan smashed a window on the Villarreal team bus on the way to the second leg in Spain.
But, although they were found not guilty of discriminatory singing, Ibrox chairman David Murray made perhaps his strongest condemnation yet of bigoted behaviour at football matches.
And he warned that European football's governing body could take tougher action in the future.
However, in its explanation of its decision and examination of a song that touches on the Catholic-Protestant divide, Uefa appears to wash its hands of what it saw as a particularly local problem.
"In examining the alleged discriminatory chants, the control & disciplinary body admitted that the nature of the song concerned - "Billy Boys" - related to a social problem in Scotland," said the statement.
"The body also believed that the disciplinary decision in this case had to be taken in the context of Scotland's social and historical background.
"Given this social and historical context, the control & disciplinary body said it considered that Uefa cannot demand an end to behaviour which has been tolerated for years.
"In view of the above, the control & disciplinary body ruled that, despite the behaviour of its supporters, Rangers FC had not infringed Article 5 of the Uefa disciplinary regulations and cannot be punished according to Article 6."
However, Article 5 says Uefa will not tolerate conduct that is "racist, discriminatory, politically extremist or insulting".
And a spokesman for Scotland's leading anti-sectarianism organisation, Nil By Mouth, described the Uefa decision "bizarre and outrageous".
"This is a shaming judgement for the whole of Scotland," he said.
"The overwhelming majority of people in Scotland, including the chairman of Rangers, think it is completely unacceptable to sing songs about being 'up to our knees in Fenian blood'."
Scottish FA president John McBeth stressed it was a problem that was being tackled.
"There is a problem," he told BBC Sport. "It's not peculiar to football. It's society's problem and one that visits on one or two of our clubs."
He welcomed Uefa's investigation as it highlighted the problem and gave added impetus to action designed to eradicate it.
McBeth pointed out that the SFA is introducing a license scheme, to be introduced later this year, that requires clubs to take action to tackle sectarianism.
"The only problem we have with European action is that it tends to be a blanket punishment on clubs," he said.
"We would like to see the people causing the problem stopped getting into grounds.
"We are working with the Scottish Executive, Scottish Office and sportscotland to introduce banning orders for troublemakers."
McBeth said that, if clubs did not take sufficient action, the SFA could impose fines, close grounds or impose suspensions.