UEFA explained that Red Star were in breach of a number of licensing and Financial Fair Play rules after looking into a complaint that they were behind on payments.
"My first reaction is UEFA has shown no understanding for our situation because this is an accumulated debt for which the club's present leadership is not responsible," vice-president Ivica Toncev told reporters.
"It was always going to be an uphill battle but we will exercise our right to appeal to the Court of Arbitration for Sport (CAS)."
Red Star, who last month won their first Serbian league title since 2007, have suffered a rapid financial decline in the past decade and were also in turmoil earlier this week when several players complained their wages were late.
Slovenia midfielder Nejc Pecnik and left back Nikola Mijailovic said they had bought food and household goods from their own savings.
Red Star's debt to creditors as well as former players and coaches has been estimated at more than 50 million euros (£40.6 million), a large sum by the standards of Serbia's ramshackle infrastructure.
Over the past seven years, when bitter city foes Partizan wrestled away domestic supremacy by landing six successive league titles, Red Star have often lacked the means for even the most basic needs such as hotel accommodation the night before a match.
With former Manchester United captain Nemanja Vidic the last big name to have come from the Belgrade club's ranks after he joined Spartak Moscow in 2004, transfer earnings have dwindled and costs have soared and they have been unable to balance their finances from meagre gate revenue and sponsorship deals.
"There is nothing worse than not being able to play in Europe's premier club competition after winning the domestic title and this is a very sad day," said former international midfielder Milos Ninkovic.
"It shouldn't have ended like this after a great year on the pitch but it might be a blessing in disguise. The entire first team will probably go our separate ways but let's wait and see what happens in the next few days."
Red Star had been due to enter next season's Champions League in the second qualifying round.
UEFA said it would also investigate the Serbian Football Association (FSS) for licensing Red Star to play in the Champions League despite being aware that the club were in violation of financial rules.
"We granted the licence as we maintained Red Star's position was barely acceptable but we also assessed that playing in Europe's top-tier competition was the fast track to the club's recovery," the FSS said in a statement.
"We are surprised with UEFA's course of action against the FSS while we also maintain that kicking Red Star out of Europe is a bitter blow to Serbian football in general."
- Sports & Recreation