It was described in the House of Commons as "another day of shame for Britain's banks", while left-wing Labour MP John McDonnell said the public now regarded the City of London as a "fetid swamp of corruption".
Stephen Hester, chief executive of RBS, made clear he would stay on to "finish the job" of turning around the Edinburgh institution – 82% owned by the public.
Chairman Sir Philip Hampton said it was a "sad day for RBS" but he vowed to "put right the mistakes of the past".
While the two bank chiefs have been spared the axe, RBS said investment banking boss John Hourican would step down, forfeiting around £9m in bonuses and long-term incentive shares.
George Osborne insisted taxpayers would not pick up the bill for the bank's wrongdoing; around £300m will be recouped from RBS's staff bonus pool and by clawing back previous awards. "What happened at RBS and other banks is totally unacceptable," declared the Chancellor, adding: "Those responsible will face the full force of the law."
Emails published by industry regulators show how traders laughed as they rigged interest rates.
One Japanese yen derivatives trader boasted to a colleague: "Our 6m fixing move the entire fixing, hahaha," while another said his up-and-down fixing made him like a "whore's drawers".
A senior RBS yen trader said: "It's just amazing how Libor fixing can make you that much money - It's a cartel now in London."
The company said 21 staff were involved in attempting to manipulate Libor interbank lending rates – specifically Japanese yen and Swiss franc Libor submissions – from 2006 to as recently as November 2010.
All 21 have left or been subject to disciplinary action and two managers with supervisory responsibilities have stepped down. Six staff have been dismissed, including two managers, while six have been severely disciplined or are going through a disciplinary process.
Another eight left the organisation before disciplinary action could be taken and one was dismissed for misconduct not related to these findings.
All staff who have left the bank as a result of the investigation received no bonus for 2012 and saw a full claw-back of any outstanding past awards.
The Financial Services Authority (FSA) uncovered bribery among bankers, with false or so-called "wash" trades being set up, generating at least £211,000 in fees to broker firms for their help in colluding to bring down Libor rates. At least 30 wash trades went undetected between September 2008 and August 2009.
RBS is now the third bank to have been fined for attempting to rig Libor after Barclays agreed a £290m settlement last year, followed in December by Swiss bank UBS, which was hit with nearly £1 billion of penalties.
It is thought around 20 banks are being investigated over their involvement in manipulating the rate, which governs the price of more than $500 trillion worth of loans and transactions around the world.
Under its settlement, RBS will pay £88m to the FSA, £208m to the Commodity Futures Trading Commission and £96m to the US Department of Justice.
The bank has also agreed a deferred prosecution agreement with the US Department of Justice; a deal that could see it face tough sanctions if it committed any form of criminal offence during the period. Its Japanese arm has pled guilty to wire fraud.
Greg Clark, Financial Secretary to the Treasury, told MPs Libor manipulation was "motivated by greed" and the findings against RBS were "grave". He said: "This is another day of shame for Britain's banks and it is vital we recognise it as such, not because Britain stands alone in this and similar scandals – which, as we know, is far from being the case – but because Britain must stand out in the way we put things right."