FIFA barred the Southeast Asian nation from staging the May 20-June 11 event after the country's football association (PSSI) in the predominantly Muslim country said it had cancelled the draw because the governor of Bali refused to host Israel's team.
Last month protesters marched in the capital Jakarta waving Indonesian and Palestinian flags, demanding that Israel should not be allowed to participate.
The removal of the Under-20 event caused anger and dismay among fans and players in the soccer-mad country.
FIFA said in a statement that it "provisionally recommended a restriction on" the use of FIFA Forward development funds for the PSSI and would reconsider lifting the sanction after reviewing Indonesia's plan to improve on Indonesian soccer.
PSSI chief Erick Thohir said in a statement that the "administrative sanction" would impact PSSI's "operational needs" but did not give further details, reiterating President Joko Widodo's instruction for him to transform the sport, which includes renovating over 20 stadiums.
"Indonesia could avoid the severe penalty of being exiled from world soccer," he said. "This is more like a yellow card, not a red card."
FIFA banned Indonesia from playing in international events in 2015 over government meddling.
