Newco Rangers will play next season in division 3 after the 30 clubs in the Scottish Football League (SFL) voted on where to place them in the table.
A majority of clubs voted to send Charles Green's newco Rangers into the third division, despite the Scottish Football Association (SFA) and the Scottish Premier League (SPL) offering an overhaul of the league structure if Rangers were placed in division one instead.
The clubs met at Hampden to decide on the fate of the club after they were refused admission into the SPL.
Twenty-five out of the 30 teams voted for Rangers to start in the third division.
SFL chief executive David Longmuir said: "This has been a very important day for Scottish football.
"The member clubs have voted to wilingly accept Rangers into the SFL. The only acceptable position was to accept the newco in division 3 from the start of 2012/2013.
"This has been one of the most difficult decisions to make for all concerned."
The decision could have catastrophic financial consequences on the state of Scottish football, with FA chief executive Stewart Regan saying the move would lead to a "slow, lingering death" of the game.
Former first minister Henry McLeish said before the vote that sending Rangers into the first division would be a "fit and proper punishment" and would benefit the SFL as a whole.
He said: "In the last season, 28% of all the people going through the turnstiles in Scotland were because of Rangers.
"If you add Celtic figures into that, 60% of all the fan base in Scotland is the Old Firm."
Dunfermline, Elgin City, Peterhead, Arbroath, Alloa Athletic, Berwick Rangers, Annan Athletic, East Fife and Clyde all said in the days before the meeting they plan to vote the Ibrox club into the bottom tier.
Only Second Division club Stenhousemuir publicly announced their decision to vote for Rangers in the second tier.
Clyde football club have expressed concerns the decision may still be overturned by the SFL and by SPL chief executive Neil Doncaster and Rangers allow play in division 1 next season:
A statement on the club's site said: "Neil Doncaster told the SFL clubs that the SPL would not allow Rangers to join the third division as the loss of £16m would not be countenanced.
"He is also on record as having said that a 16-team league would cost £20m, therefore we can hardly have confidence that the focus on finance will allow these proposals to come to life.
"Given that the SPL and SFA have signalled a clear intention to act against any decision that might result in Sevco Scotland Ltd being admitted to the third division.
"We can expect that, no matter what the SFL clubs decide, Sevco Scotland will not be playing in the third division in the coming season."
Dunfermline and Dundee are due to learn on Monday who will replace the Ibrox club in the top flight.
Written by Ewan Palmer