Manchester City have been fined €60m and instructed to reduce their Champions League squad from 25 to 21 players next season as a result of breaching UEFA's financial fair play rules.

The European governing body yesterday confirmed the sanctions in a statement, although City will have €40m of their fine returned should they comply with spending controls agreed with UEFA.

The English champions have accepted the sanctions, which also include a salary freeze on the players in their Champions League squad for the next two seasons and a demand to "significantly limit spending in the transfer market for seasons 2014/2015 and 2015/2016".

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City have been found guilty of breaking financial fair play rules, alongside the French champions Paris Saint-Germain, Galatasaray, Trabzonspor and Bursaspor of Turkey, Russia's Zenit St Petersburg, Anzhi Makhachkala and Rubin Kazan, and also Levski Sofia from Bulgaria.

In a statement last night, City acknowledged that they have agreed to limit their net spending on new players this summer to £49m. It read: "The club's expenditure on players for the upcoming summer transfer window, on top of income from those players it might sell, will be limited to €60m [£49m]. This will have no material impact on the club's planned transfer activity."

City claimed initially there had been "a fundamental disagreement" over the interpretation of the FFP regulations on players purchased before 2010. However, the club had "decided to enter into a compromise agreement with UEFA".

The statement added: "The MCFC Champions League squad for the 2014/15 competition will be limited to 21 players. In 2013/14, the club registered 23 players for the competition and used 21. The wage bill of the whole club [playing and non-playing staff] for 2014/15 will need to remain at the same level as that of 2013/14.

"It is important to note that additional bonuses for performances can be paid outside this number. The club expects to be operating without sanction from the 2015/16 season."