Babbel must quit Stuttgart at end of season
The former Stuttgart assistant coach took over as team manager last month after the sacking of Armin Veh but does not have the qualifications to coach in Germany's top division.
"Markus Babbel may only carry out the role of head coach at VfB Stuttgart until the end of the 2008-9 season," the German FA said in a statement.
"The decision to allow him to coach until then was taken on account of the fact that he possesses a (lower level) A-licence and was already part of the coaching staff at Stuttgart.
"But any further extension has been ruled out."
A Stuttgart official told Reuters it would not be possible for Babbel to get the necessary qualifications this season.
The official said there would be no further comment from the club until after Thursday's decisive UEFA Cup Group C match at home to Standard Liege.
Babbel's lack of qualifications has not prevented him making an impressive start to his Bundesliga coaching career.
Since taking over from Veh, the former Germany international has steered Stuttgart to two wins and a 2-2 draw on Saturday against his former club, Bundesliga champions Bayern Munich.