The club will be lodging an appeal
London Welsh said they were "shocked" after being docked five points and fined £15,000 (US$22,534) for fielding an ineligible player in the English Premiership this season.
The Exiles, who are in their first campaign in the top flight following promotion last term, dropped to the bottom of the Premiership, two points behind Sale.
They also received a further five-point deduction, suspended until the end of next season.
However, the decision meant London Welsh could still avoid finishing the season bottom of the table and in the lone relegation place, amid concerns they might have suffered a crippling points penalty which would have rendered their remaining league matches 'meaningless' from their point of view.
The case, which was first heard by a Rugby Football Union Premiership regulations panel on Tuesday, centred around the club's New Zealand scrumhalf Tyson Keats, who appeared in 10 league games this season when not properly registered and was visa related.
In response the club, who notified the RFU of the potential problem, issued a statement saying they would be appealing against the ruling.
"London Welsh RFC are extremely disappointed with the decision to deduct the club 10 league points, five of them suspended until the end of season 2013-14, and to fine it £15,000, in regard to the charge that the club fielded an ineligible player, Tyson Keats, in the Premiership this season," the statement said.
"London Welsh can confirm that it will be lodging an appeal against the ruling," the statement added, saying the club had been the victim of one individual's "fraudulent conduct", a reference to former manager Mike Scott, who is the subject of a separate RFU hearing into Keats's registration.
London Welsh now have five matches - away to Gloucester, Bath and London Irish, and at home to Northampton and Worcester - in which to avoid the drop. Their next league match is against Gloucester on March 23.
London Welsh provided a record seven players for the victorious 1971 British and Irish Lions tour of New Zealand including captain John Dawes as well as Wales greats JPR Williams, Gerald Davies, Mervyn Davies and John Taylor, now the club's managing director.
Their promotion was not confirmed until after last term following the club's successful appeal against a RFU ruling they'd contravened Premiership entry criteria in not having primacy of tenure at Oxford United football club's Kassam Stadium.
North-east side Newcastle were relegated having finished bottom of the Premiership.
London Welsh are playing at the Kassam, some 50 miles away from their base in Richmond, south-west London, as their home ground of Old Deer Park does not satisfy Premiership regulations.