The decision throws the future of 216 students into immediate doubt with the school to lose its provisional ACT registration as a result.

ACT Education Minister Shane Rattenbury said on Monday that the Education Directorate would be working to ensure all Islamic school students were accommodated in government schools from the beginning of Term 2.

Federal Education Minister Simon Birmingham said of his decision to revoke the funding, "unfortunately, the authority that operates the Islamic School of Canberra was not able to demonstrate to my department that they had addressed the significant concerns about their independence, financial management and governance arrangements raised during the formal compliance review of their operations."

Senator Birmingham said the act required, among other obligations, that all school authorities operated not-for-profit, were financially viable, be a "fit and proper person" and ensure that funding provided was used only for school education.

Islamic Council of Canberra chairman Mohammed Berjaoui said the school was seeking advice from its financial consultant Grant Thornton and had 30 days to appeal the decision, which it would do.

"I am still optimistic we can sort this out," said Mr Berjaoui, who is also the school's financial manager.

He wanted students and their families to continue to come to school until further notice.

Earlier this month, the Malek Fahd Islamic School has also had its $20 million federal funding cut following a nine-month financial audit.

It is the largest Islamic school in the country, catering to nearly 2400 students across three campuses.

The Canberra Islamic School and Malek Fahd are two of six Islamic schools across the country operated by the Australian Federation of Islamic Councils, along with the Islamic College of Brisbane, the Islamic College of Melbourne, the Islamic College of South Australia and Langford Islamic College in Western Australia.

All six schools came under investigation by the federal Department of Education last year after a string of sackings among senior staff members and principals, allegations of financial mismanagement and concerns over the delivery of the curriculum.

The department said on Monday that that it is "continuing its compliance assessment on four other school authorities affiliated with the Australian Federation of Islamic Councils."

Senator Birmingham said, "Last year the department issued a formal compliance notice when it found that the school authority was not complying with fundamental governance, financial and accountability requirements of the Australian Education Act 2013.

"After carefully considering their response to the issues raised in the compliance notice, my department determined that it will revoke the funding approval. This follows a decision earlier this month to revoke the approval of Malek Fahd Islamic School Limited, another school authority affiliated with AFIC."

The revocation of funding would take effect from April 8. Senator Birmingham said his department would work with the ACT government to "help ensure students and families that are impacted by this decision receive the appropriate support".

"I am committed to ensuring that all school authorities meet the requirements of the Education Act to ensure that our taxpayer dollars and any private investment by parents is being spent to benefit Australian students," he said.

"School governance should be of the highest standard and funding should be exclusively used for the education and welfare of students."

Mr Berjaoui has previously strenuously denied any financial shortcomings at the school, saying it was cooperating fully with authorities.

Mr Rattenbury said he was saddened the Commonwealth's decision would "likely lead to the closure of the school". Unless it won back its funding on appeal, the ACT Government had no option but to withdraw its registration.

"Last year the ACT Education Directorate became aware of some governance issues in relation to ISC and, as such, the school was granted temporary conditional funding from the ACT Government until December 2016," he said.

"This funding was conditional, and outlined that the organisation/school would not meet the financial viability requirements without Commonwealth funding, which provides roughly 55 per cent of their funding ($1.1m)."

Mr Rattenbury said the directorate has contacted the school and advised them that "all their current students can be catered for in ACT Public Schools. The Directorate will work with the school community, including parents, carers and students to support them in accessing another school for term 2 2016."

The student body comes from across Canberra to attend the low-fee independent school – drawn from 73 suburbs, according to Mr Rattenbury.