More than 2,000 students potentially face removal after a university had its to teach and recruit students from outside the EU revoked.
The UK Border Agency (UKBA) says student attendance at London Metropolitan University is not being monitored and that many have no right to be here.
As a result, the university will no longer be allowed to authorise visas.
The university said it would be challenging UKBA's claims.
A task force has been set up to help students affected by the decision which means some 2,000 overseas non-EU students will have to find an alternative institution to sponsor them or they will be told that they will be removed from the UK.
The government says it wants to assess how many students will be successfully reallocated to alternative institutions before the UKBA sends out notices giving them 60 days to leave. At this stage, the Home Office is unable to say when those notices will be issued.
The UKBA says London Metropolitan University had "failed to address serious and systemic failings" identified six months ago.
Immigration Minister Damian Green said London Metropolitan University had failed in three particular areas:
- More than a quarter of the 101 students sampled were studying at the university when they had no leave to remain in this country
- Some 20 of 50 checked files found "no proper evidence" that the students' mandatory English levels had been reached
- And some 142 of 250 (57%) sampled records had attendance monitoring issues, which meant it was impossible for the university to know whether students were turning up for classes or not.
Professor Malcolm Gillies, the university's vice chancellor, described the claims made against the institution as "not particularly cogent" and said it would be disputing them.
"I would go so far as to say that UKBA has been rewriting its own guidelines on this issue and this is something which should cause concern to all universities in the UK," he said.
'Panic and heartbreak'
Although there have been other suspensions, no other UK university has been fully stripped of its ability to recruit overseas students.
With increased competition and pressure on funding, many UK universities have looked to the lucrative overseas student market.
This is because overseas non-EU students pay higher fees than home students.
In 2010-11, there were a total of 48,580 overseas undergraduates studying in the UK.
That's about 11% of the total undergraduate population, but it generates 32% of universities' fee income.
Overall foreign students contribute an estimated £5bn a year to the wider economy, including fees.
Universities UK says this could increase to £16.9bn by 2025.
But it has warned that moves to tighten visa rules will hit UK universities' ability to recruit foreign students.
The NUS and academics' union UCU also fear that taking such a tough stance will send a damaging message to bona fide potential foreign students.
However, the UKBA says London Metropolitan failed to carry out basic procedures.
The National Union of Students (NUS) has contacted Prime Minister David Cameron and Home Secretary Theresa May to "express anger at the way that decisions have been made in recent weeks and to reiterate the potentially catastrophic effects on higher education as a £12.5bn per year export industry for the UK".
NUS president Liam Burns added that the decision could have been limited to future students rather than covering existing ones.
Meanwhile, a group of London Metropolitan University students have held a protest outside Downing Street.
Dozens of students and supporters sat in silence in front of the gates to Number 10, with tape over their mouths, before police moved them across the street.
The UKBA said allowing London Metropolitan University to continue to sponsor and teach international students "was not an option".
It said it had been working with the university since it identified failings six months ago.
It added: "These are problems with one university, not the whole sector. British universities are among the best in the world – and Britain remains a top-class destination for top-class international students."
Universities Minister David Willetts has announced a task force to help overseas students affected by the decision, which will include UKBA and the NUS.
He said: "It is important that genuine students who are affected through no fault of their own are offered prompt advice and help, including, if necessary, with finding other institutions at which to finish their studies."
But Universities UK chief executive Nicola Dandridge said the UKBA had made "an extraordinary decision" which was both "surprising and disproportionate".
"It is one thing raising issues if they have them with London Met and, if appropriate, penalising the university. That may be appropriate or it may not be.
"But penalising legitimate international students is disproportionate and it is damaging to our international reputation.
She also pointed to the "widespread concern" among international students at other universities that they would also be "affected in some way".
"It is really important they understand that what has happened today and yesterday is isolated and it only affects London Metropolitan."
The University and College Union also warned that the move would have an impact on future recruitment of foreign students.