Billionaire mining magnate Andrew Forrest has pledged to do everything within his powers to save the Force, and the issue is now almost certain to be battled in the courts.
The Force had grown confident in recent weeks that they would survive the axe, but today's arbitration decision leaves them on death's door.
The Perth-based franchise finished second in the Australian conference during the Super Rugby season, and had nine players selected in an extended Wallabies squad last month.
But if their expected appeal fails, they will be left with no choice but to wrap up operations.
The ARU said the decision to "discontinue the Force's licence" was based primarily on financial outcomes.
ARU chairman Cameron Clyne said Australian rugby couldn't sustain five teams.
The Rebels were the other team on the chopping block, but they are now safe.
The Victorian Rugby Union now owns the Rebels after buying it off former owner Andrew Cox for $1.
"This is a sad day for rugby, especially for Western Force fans," Clyne said in a statement.
"We accept that there will be anger and resentment over this decision and we sympathise with those fans. We sincerely hope that they are not lost to the game forever.
"The decision to exit the Western Force from Super Rugby is not a decision to abandon the game in Western Australia.
"Western Australia will retain an important place in Australian rugby and the ARU will continue to support youth development programs and the community game in the West.
"There will be a clear pathway for young Western Australian rugby players to reach the highest level and represent the Wallabies."
The Force entered the competition in 2006, but failed to make the finals.
Their best finish was in 2014, when they only narrowly missed the finals with a 9-7 record.
The Force made vast improvement this year under rookie coach Dave Wessels, unearthing a host of talented players that the franchise hoped would carry them to a title within the next three years.
"Whilst the board of RugbyWA is extremely disappointed with the ARU's stated position, with the support of the Rugby community and numerous WA business identities including Mr Andrew Forrest we will continue the fight to retain the Force in Western Australia," the Force said in a statement.
