Aljazeera and Dubai-based al-Arabiya were issued two-week bans for breaking so-called ‘rules’.
Other media organisations were served notices that action would be taken without warning against any future infractions.
The Governing Council declared bans on inciting violence, disorder, or any reporting that directly or indirectly represents the ousted Baath party. They said breaches of the rules posed a risk to democracy and the stability of Iraq.
"Al-Jazeera and Al-Arabiya will temporarily be excluded from any coverage of Governing Council activities or official press conferences, and correspondents of the two channels will not be allowed to enter ministries or government offices for two weeks," it said.
“At the end of the day, we are not in the business of censoring news and information, especially from our viewers"
Aljazeera officials condemned the move, saying it violates basic rights of democracy and journalistic freedom.
Speaking to CNN, Aljazeera spokesperson Jihad Balout said, “my organisation is dismayed at this decision, and we certainly believe that there are several victims to the decision, firstly the truth, because it will be missing ... and the second one is the freedom of the press.”
“Al-Jazeera has been under pressure ever since day one of its existence, although it really adopts and practices the same principles of freedom of the press, and democracy and multiplicity of views as always advocated and asked people to do.”
US officials have been critical of the two satellite channels, saying they give too much prominence to anti-US attacks and provide a forum for members of the ousted government of Saddam Hussein.
“At the end of the day, we are not in the business of censoring news and information, especially from our viewers. I think it's incumbent on us to give our viewers out there as full a picture as possible, and as balanced [a] picture as possible and as comprehensive as possible,” Balout added.
British MP and Iraq expert George Galloway said the decision was an indictment of the way the American-led forces were running the country.
"This puts a nail in the coffin of the big lie that the West was going into Iraq to liberate the country in the name of freedom and democracy and to rid it of the yoke of dictatorship," he said.
"Aljazeera and al-Arabiya have the right to report news. They cater to their audience and will obviously favouritise stories their audience is interested in.
"Other media organisations should protest vociferously against this decision because today it is Aljazeera and al-Arabiya but tomorrow it could be them."
He predicted the censorship would ultimately backfire on the occupation forces.
"The British Prime Minister banned the Irish Republican Army in the 1980s and tried to deny them access to all media. But all that achieved was to reduce the government to the level of the IRA and to make them a laughing stock," he said.