The Swedish tennis federation has been fined $25,000 and Malmo banned from hosting Davis Cup matches for five years after the city's authorities opted to play last month's tie against Israel behind closed doors.
The International Tennis Federation (ITF) also said in a statement Sweden would have to pay an additional $15,000, which it would have received in gate receipts had the March 6-8 match been open to spectators.
The safety of the Israeli team in Malmo, a city with a large Muslim community, prompted the local authorities to act.
"The (Davis Cup) committee strongly condemned the decision by the city government of Malmo to refuse to allow spectators to attend the matches and the resultant fact the Swedish Tennis Association played the tie behind closed doors," the committee said in a statement on the ITF website (www.itftennis.com).
Sweden are planning to appeal against the decision because of the security threat that existed around the tie, which Israel won 3-2 to reach the quarter-finals.
"The fact that over 1,000 police officers from the entire country had been commanded to Malmo and that equipment and cars had been borrowed from Denmark speaks for itself," general secretary Henrik Kallen told the Swedish federation's website (www.tennis.se).
"The Swedish federation still considers it irresponsible and unacceptable that individual local politicians have used Malmo's situation for their own causes.
"It has hurt the city of Malmo and Swedish sports internationally which manifests itself among other things in this fine by the ITF."
Other conditions were also placed on Sweden by the committee, including a written guarantee future ties would be open to the public.
The ITF said Sweden would also lose the right to choose the venue if a similar situation occurs in the future.
It added the security measures in place would have allowed the match to go ahead as usual even though more than 6,000 demonstrators protested against Israel's presence in the competition.
Before the tie Israeli doubles specialist Andy Ram called the decision to bar fans "idiotic" and said it was worse than a move by United Arab Emirates to deny entry to his compatriot Shahar Peer for a women's tournament in Dubai in February.
"Sweden's actions are way more degrading than Dubai's," Ram said at the time.
"Dubai is an Arab state we don't have any ties to. That they, right after a war, find it hard to accept an Israeli I can understand. But with Sweden we have normal ties."
The Dubai women's event was fined a record $300,000 by the Women's Tennis Association for barring Peer.
Tensions between Israel and its Arab neighbours have been heightened by the three-week Israeli offensive in the Gaza Strip that ended in January and killed 1,300 Palestinians and 14 Israelis.