The three-man Adjudication Panel for England unanimously ruled that Mr Livingstone had been "unnecessarily insensitive and offensive" to Evening Standard journalist, Oliver Finegold, by comparing him to a Nazi concentration camp guard in February last year.
David Laverick, chairman of the panel sitting in central London, said: " The appropriate sanction is for the mayor to be suspended for a period of four weeks from March 1."
He said the panel was "concerned" that Mr Livingstone had failed to realise the seriousness of his outburst.
Mr Laverick said: "The case tribunal accepts that this is not a situation when it would be appropriate to disqualify the Mayor.
"The Case Tribunal is however concerned that the Mayor does seem to have failed, from the outset of this case, to have appreciated that his conduct was unacceptable, was a breach of the code (the GLA code of conduct) and did damage to the reputation of his office.
"His representative is quite right in saying, as he did on February 23, that matters should not have got as far as this but it is the Mayor who must take responsibility for this.
"It was his comments that started the matter and thereafter his position seems to have become ever more entrenched."
After the ruling Tony Child, representing Mr Livingstone, said: "This is extremely disappointing. We will be considering our right to appeal to the High Court."
Since Mr Livingstone lost the case he must pay his own costs - estimated to be at more than £80,000.
The matter was referred to the Local Government watchdog, the Standards Board for England after a complaint by the Jewish Board of Deputies.
The Standards Board's costs total approximately £45,000. The greater part of this has been due to complex legal issues raised during the four day case.
It is understood that the costs for the Adjudication Panel are approximately £7,000.
Trouble flared as Mr Livingstone was approached by Mr Finegold as he left a party marking 20 years since former Culture Secretary Chris Smith became Britain's first openly-gay MP.
Mr Livingstone asked Mr Finegold whether he had ever been a "German war criminal".
On hearing that Mr Finegold was Jewish, the Mayor likened him to a Nazi concentration camp guard.
The panel was told Mr Livingstone had been expressing his long and honestly held political view of Associated Newspapers, publishers of the Daily Mail and Evening Standard.
Mr Livingstone accused Associated Newspapers of a history of anti-Semitism and the Evening Standard of "harassing" the largely gay private reception. The City Hall party had been paid for by public money.
In the storm which arose after his outburst, Mr Livingstone said he had never meant to downplay the horror of the Holocaust or offend the Jewish community.
He refused to apologise despite pressure from the Jewish community, Holocaust survivors and other politicians.
He said he had hit back after a 24-year hate campaign by the media. He said he was using his freedom of expression and that he had been rude to journalists for 25-years and would continue to be so.
The Evening Standard editor Veronica Wadley welcomed the panel's ruling against Mr Livingstone.
She said: "There is no question that he caused offence to many Londoners by his comments, and his stubborn refusal to say sorry aggravated the position.
"Mr Livingstone not only offended London's Jewish community but then he did not show the stature expected of the mayor of London by apologising.
"As the Standards Board found, our reporter questioned Mr Livingstone in a 'civil tone'.
"As the tape recording shows, Oliver Finegold did not swear at the mayor, or was in any way hostile."
She added: "This paper has not always seen eye to eye with Mr Livingstone but we have applauded his work in helping to unite London after 7/7.
"We believe, though, that it is only right that the adjudication panel has now decided that Mr Livingstone acted in a manner that was ill-fitting for the mayor of this great city. Mr Livingstone should now apologise to those he offended."
Sir Anthony Holland, chair of the Standards Board for England, said: " The public expects all elected members to conduct themselves in a manner that is beyond reproach.
"It is right that the facts of this case have been aired and considered in public in this way."
London Jewish Forum chairman Adrian Cohen welcomed the ruling but said: "It should never have reached this point when a simple apology could have avoided all the pain caused to so many Jewish Londoners who have been affected by the Holocaust.
"There is a strong desire in the Jewish community to move forward from this on a positive basis."
London Assembly deputy chairman Brian Coleman said the ruling was "a humiliation" for the mayor.
"He has let down every Londoner who has ever put their trust in him. His remarks were deeply offensive to every decent-minded person."
Jeremy Newmark, executive director of the Jewish Leadership Council, said: "It should never have come to this. A five-minute conversation has ended up in a vast expenditure to taxpayers and caused additional hurt and pain to Holocaust survivors in London."
North Southwark and Bermondsey MP and Liberal Democrat leadership contender Simon Hughes said: "A large number of Londoners found the Mayor's remarks clearly offensive.
"It is sad that the Mayor Livingstone has not accepted that, nor chosen to apologise for what he said.
"Ken should do that now and demonstrate that he is a mayor for all of London not just certain groups within the capital."
Holocaust survivors had "found it a rather painful way to express an opinion", according to Karen Pollock, chief executive of the Holocaust Educational Trust.
"People in positions of responsibility and power have to be particularly sensitive in terms of the language they use. No one wanted it to escalate or lead to this process," she said.
Nicky Gavron, the deputy mayor of London, said: "This decision is absurd and strikes at the roots of democracy.
"Millions of Londoners elected the mayor - and three unelected officials remove him.
"An elected mayor should only be removed by the law or by the electorate. Not by an unelected body.
"This issue should never have come to the standards board in the first place - it was given a thorough airing at the time.
"But it has been blown out of all proportion.
"What Londoners care about most are issues like safer streets, more buses and a cleaner environment."
Baroness Sally Hamwee, chair of the London Assembly, said: "It has done the reputation of the GLA no good that it had to come to this.
"The Assembly called on Mr Livingstone at the time to apologise for his remarks, and had he done so, the affair might have died down without so much time and public as well as private money being wasted, and further damage done to the profession of politics."
Tory Brian Coleman, the deputy chairman of the London Assembly, said: "London deserves better.
"His complete failure of judgment and leadership raises serious questions about his suitability for office.
"During the proceedings, the mayor's lawyer compared him to the disgraced politicians John Profumo, Jeffrey Archer and David Blunkett, claiming they brought shame on themselves but not their office. If that is the case, Mr Livingstone, then why did they all resign?
"He seriously needs to consider his future."
Lord Tope, leader of the London Assembly Liberal Democrat group, said: "Mr Livingstone brought this on himself by making these insensitive remarks which caused a good deal of offence to a large number of Londoners.
"It would have been much simpler for all concerned if the mayor had apologised immediately as we said he should do so at the time.
"The nature of these remarks brought the office of the mayor of London into disrepute and caused damage to community cohesion in London."
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