The UK Competition Commission (UKCC) has told Ryanair to reduce its 29.8% stake in Aer Lingus to 5%.
This will be accompanied by obligations on Ryanair not to seek or accept board representation or acquire further shares.
Ryanair boss Michael O'Leary has said he expected a negative result from the commission.
Before the UKCC formally released its report this morning, Mr O'Leary prepared a statement saying he would challenge a negative result which said that his 29.8% minority shareholding in Aer Lingus "had led or may be expected to lead to a substantial lessening of competition between the airlines on routes between Great Britain and Ireland".
The no-frills airline said the claim was baseless and was "manifestly disproven by seven years of evidence".
In their criticism of the UK's regulatory body, Ryanair cited a recent European Commission ruling that competition between Ryanair and Aer Lingus has "intensified" since 2007.
Describing the UKCC's ruling as manifestly unjust, Ryanair said it will appeal the commission's decision to the UK Competition Appeal Tribunal.
Aer Lingus has welcomed the ruling by the UK Competition Commission.
Aer Lingus Chairman Colm Barrington said it was unacceptable that the airlinie's principal competitor was allowed to remain on its share register with a shareholding of 29.8% and interfere with the business, despite the European Commission blocking Ryanair's attempts to takeover the airline.
The Department of Transport, Tourism and Sport has also welcomed the ruling.
It said: "The Government's principal concern has always been to ensure continuing and effective competition in the air transport market as this clearly benefits passengers, businesses and the economy.
"The Department considers that the best means of achieving that is by ensuring the continued presence of at least two separate, strong airlines in the market competing effectively against one another.
"Today's ruling by the Competition Commission in the UK will help to ensure that that is the case."
Simon Polito, Deputy Chairman of the UK Competition Commission, has said that a legal appeal by Ryanair could take between one year and 18 months.
Mr Polito said the UKCC's main concern was that Ryanair's shareholding would impede the commercial strategy of Aer Lingus.
Speaking on RTÉ's News At One, he said that consumers would ultimately benefit from the process.
He said the process was now "largely in the hands of Ryanair" in terms of the appeal that the airline has signalled it will take.
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