In the fifth minute of added time during the second round match between Italy and Australia, Azzurri fullback Fabio Grosso appeared to trip over Socceroos defender Lucas Neill, with Spanish referee Luis Medina Cantalejo awarding Italy a penalty.
Australia's players and fans were shocked and outraged, with substitute Francesco Totti putting his penalty shot past Socceroos keeper Mark Schwarzer to give 10-man Italy a dramatic 1-0 win and a place in the quarter-finals.
Fifa were accused of not addressing the issues of diving and feigning injury at the World Cup, with debate raging over decisions such as Italy's penalty.
In a television interview in Sydney on Sunday, Blatter admitted that the referees at the finals in Germany "were not at their best", however he added that the behaviour of players was the real problem for the game.
"I think there was too much cheating on the players' side," Blatter said.
"I agree with them and I would like to apologise (to) our fans in Australia.
"The Socceroos should have gone into the quarter-finals in place of Italy... you go into extra time and you are 11 against 10. But that is presumptuous."
Blatter also said that the standard of refereeing at the World Cup was not up to the standard that he would have liked.
"I said at the referees' committee after the World Cup, when compared to the performance of 2002, you have improved, but in my opinion not enough."
"But from the quarter-final to the semi-final, then you see the referees were back to being the best," he added.
Pay more attention
Neill, who plays for English Premier League side Blackburn Rovers, welcomed Blatter's apology but said the situation was worsening.
"It's pleasing to see FIFA is at last acknowledging and paying more attention to the issue," he said.
Football Federation Australia (FFA) officials accepted Blatter's apology, but remained wary that it came during an interview for Australian consumption only.
"It's well after the event," FFA chief executive John O'Neill said.
"The position he's stated is what all of Australian football fans felt at the time.
"It's now four months after the tournament. It's a nice gesture, but it doesn't change the result."