BBC Sport's James Pearce explains the Kakuta ruling
Chelsea have been banned from signing any new players until January 2011.
The punishment was meted out by world governing body Fifa after the club was found guilty of inducing Gael Kakuta to break his contract with Lens in 2007.
A Fifa statement said the Blues would not be able to register new players in the next two transfer windows.
Chelsea insist they will "mount the strongest appeal possible" and say the sanctions are "totally disproportionate to the alleged offence".
A statement from the Premier League club, who will make their appeal to the Court of Arbitration for Sport (Cas), added: "We cannot comment further until we receive the full written rationale for this extraordinarily arbitrary decision."
Fifa's dispute resolution chamber (DRC) ruled French winger Kakuta, now 18, must also pay compensation of 780,000 euros (£682,000), for which Chelsea are "jointly and severally liable".
Lens lodged a complaint with Fifa after Chelsea signed Kakuta two years ago.
Now the DRC has ruled the player breached his contract with Lens and Chelsea induced him to do so.
Fifa's statement said: "The French club had lodged a claim with Fifa seeking compensation for breach of contract from the player and requesting also sporting sanctions to be imposed on the player and the English club for breach of contract and inducement to breach of contract.
"The DRC found that the player had indeed breached a contract signed with the French club. Equally, the DRC deemed it to be established that the English club induced the player to such breach."
Kakuta, 18, joined Chelsea from French side Lens in 2007
Chelsea must pay additional "training compensation" of 130,000 euros (£114,000) to Lens, while the player has been banned from playing in official matches for four months.
Kakuta ended 2007/8, his first season with Chelsea, as the youth team's top scorer and was voted the academy's player of the year.
He played five times for the youth team and twice for the reserves in his second season before it was brought to an abrupt end in February when he suffered a double fracture of his ankle.
The Lille-born youngster has never played for Chelsea's first team, although he is back to full fitness and has been featuring in the reserves this season.
Fifa's decision to ban Chelsea means they will not be able to sign players in the January and summer 2010 transfer windows.
"Chelsea are banned from registering any new players, either nationally or internationally, for the next two entire and consecutive registration periods," said the Fifa statement.
Lens president Gervais Martel said he felt the judgement was fair and would send out a warning message to any clubs breaking the rules.
"We expected this kind of decision. The player was under contract with us and they came and stole him away from us," he said.
"Chelsea didn't follow the rules. They contacted the player when he wasn't even 16 and while he had been contracted to our training group from the age of eight.
"The financial sanction isn't over the top given the nature of the infringement, but it's really quite significant when it comes to not being able to recruit players.
"It's an important message given that protecting up-and-coming youth players who are contracted to clubs is an issue being followed closely by Uefa president Michel Platini."
Chelsea's Premier League rivals Manchester United have also been accused of poaching a young player from a French club, although the reigning champions have dismissed claims by Le Havre that they acted improperly when they signed Paul Pogba.
Le Havre say Pogba, 16, had agreed to play for them in the 2009/10 season and that they will ask world governing body Fifa to investigate the matter.
But a Manchester United spokesman told BBC Sport last month: "It is complete nonsense. Everything has been done within Uefa (European governing body) guidelines."
Fifa punished Switzerland's FC Sion for a similar offence to Chelsea's in April and the club was told it could not sign players until the 2010 off-season.
This was punishment for signing Egypt goalkeeper Essam El Hadary in 2008 before his deal with Al-Ahly had expired.
If I'm a lawyer advising my club, I would ensure at all times they are not seen to be inducing that breach of contract
Sports lawyer Oliver Hunt
Like Kakuta, El Hadary received a four-month ban from playing.
Sion have appealed to Cas, which has frozen the sanctions while it considers the case, allowing the club to trade before the current season began. A ruling is expected later this year.
Italian side Roma were given a ban for two transfer windows following defender Philippe Mexes' move from Auxerre in 2004.
Roma appealed to the Cas and had the ban cut to one transfer window.
A leading sports lawyer said the decision to punish the Blues is a warning shot to the game's biggest clubs.
"This is an example of Fifa showing just how important it views the regulations," Dan Harrington, of sports business law firm Couchman Harrington Associates, told the BBC.
"The ramifications at the club are potentially huge."
Chelsea were fined in 2005 by the Premier League for tapping up Arsenal defender Ashley Cole.
That case may have been a factor in Fifa's punishment, according to Adam Morallee, of London law firm Mishcon de Reya.
"With Ashley Cole it was £300,000, but it didn't matter," he said, referring to what is a relatively small sum for a club backed by billionaire Roman Abramovich.
"This does matter. It's a case of a governing body laying down a punishment that actually affects a big club."
If Chelsea have made a mistake on this one, it's a very, very heavy price to pay
Ex-Chelsea player Pat Nevin
Oliver Hunt, of London firm onside law, thinks clubs will think twice before inducing a player to break a contract.
"To be effectively banned from two transfer windows is a huge, huge sanction," he told the BBC.
"That sanction is in the regulations and people will now take it very, very seriously. If I'm a lawyer advising my club, I would ensure at all times they are not seen to be inducing that breach of contract."
Pat Nevin told BBC Radio 5 live that he believed clubs have been guilty of "tapping up" players for years.
"It has gone on forever," said the ex-Chelsea winger. "If it's done in a really subtle way, usually clubs can get away with it. If Chelsea have made a mistake on this one, it's a very, very heavy price to pay."
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