The Islamic School of Canberra will appeal the federal government's decision to revoke its funding after a long-running investigation into its independence, governance and financial management.
Federal Education Minister Simon Birmingham announced on Friday that the $1 million provided by the federal government each year, covering about 80 per cent of the Weston school's operational costs, would cease on July 1.
Senator Birmingham said the school had failed to meet "the standards and expectations placed on them" after first losing its funding last year following an examination of its links with the Australian Federation of Islamic Councils.
"These conditions centred around improvements to governance and financial management and required regular reporting on progress in making the required changes," he said.
"Schools receive significant taxpayer funding. Australians rightly expect that every taxpayer dollar committed to school education is genuinely expended on school education and for the benefit of students."
In a letter to parents, principal David Johns said the school would appeal the government's decision and was confident of a positive outcome.
"I understand that this information will be distressing for our community and I anticipate the next few week will be challenging for us all," he said.
"I emphasise to you all that the Islamic School of Canberra continues to be in full operation and I ask families to continue to support our school and prepare students for a return to school next week."
The Australian Federation of Islamic Councils owns the Islamic School of Canberra's campus and provides the space rent-free.
President Keysar Trad said his organisation voted to relinquish control of the school and had handed "unprecedented" autonomy to its board after the government first signalled its concerns in March last year .
However, Mr Trad said that AFIC had provided the Islamic School of Canberra with $2.3 million last year to help it meet operational costs due to uncertainty about its future government funding.
The school also accepted a $45,000 interest-free loan in October to help it pay its staff.
Mr Trad said there were questions about the conduct of the former school board, but the new school board, elected after the government's concerns were first outlined, had inherited the school's financial woes.
Asked whether AFIC had benefited financially from the school, as was found at schools interstate, Mr Trad said: "During my time, up until my organisation stopped accounting services on behalf of the school, we did not take funds from their coffers. We paid their bills."
AFIC was in caretaker mode so no decision could be made about whether the organisation would step in with funding, he said.
The Islamic School of Canberra, which has more than 200 students including the children of staff related to diplomatic missions, is still registered by the ACT government and may continue to operate.
Chief Minister Andrew Barr acknowledged that Senator Birmingham's announcement would "certainly have implications for the future of the school" but was unable to outline the ACT government's next move.
"This is an issue that has had a bit of history and we certainly need to respond to what the Commonwealth has done today and the Education Department will follow the usual practice as it relates to both registration and funding," he said.
An Education Directorate spokeswoman said the government system was ready to take in all students at the Islamic School of Canberra.
"The Education Directorate will continue to work with the Commonwealth and the school for the best interests of the students and the community," she said.
"The ACT Government will continue to work with the school and the Commonwealth around meeting the criteria under the Education Act, including their financial viability."
The school has previously denied that it had not met the government's demands.