City's Milton Road ground fell short of the 'Category B' rating required of all Blue Square sides owing to a lack of terracing behind both goals and inadequate turnstile facilities.
Fans' director Rab Crangle admitted he was disappointed with the ruling, but added that the club had no choice other than to accept the FA's decision.
It was obviously disappointing, but we had a fair hearing from the FA
Cambridge City fans' director Rab Crangle
"It was obviously disappointing, but we had a fair hearing from the FA," Crangle told BBC Radio Cambridgeshire.
"We have been subject to the rules and the decisions of the league.
"Anyone who goes to Milton Road knows that it's a very good ground in comparison to other grounds in the league."
Clubs throughout non-league were handed a deadline of 31 March to get their facilities up to scratch, although City had the added concern of fighting a legal battle with their landlords Ross River.
The Lilywhites only won the right to remain at Milton Road until 2010 last autumn, and the club argued the court action left them with no time or money to improve the ground.
"We made the case that legal action left us in the position that we were unable to confirm until the end of the court case that we would definitely be at Milton Road," Crangle said.
"But they [the FA] felt the rules had to be applied and that our exceptional circumstances weren't enough to overcome that."
Nevertheless, despite this latest setback, the club are optimistic for next season with boss Gary Roberts and several key players already signed up for the new campaign.
Crangle said: "Gary is 100% staying with the club, we have signed players up and we can at the very least look to a very good season next year in the Southern League.
"Cambridge City goes forward - the only disappointment is that we go forward this season in the Southern League rather than the Conference South."
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Interview: Fans' director Rab Crangle
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