The Canadian football Association were also fined 200,000 Swiss francs ($NZ384,000) in a case that rocked the Paris Games.
Priestman, who has coached the team since 2020 and led them to the Olympic title in Tokyo a year later, and Canadian officials Joseph Lombardi and Jasmine Mander have been banned from any football-related activity for one year for "offensive behaviour and violation of the principles of fair play", FIFA said.
New Zealand had complained that Canadian staff flew drones over their training sessions before their opening fixture at the Olympics, which Canada won 2-1.
Following FIFA's decision, the reigning Olympic champions will drop to minus three points in Group A, with two matches left to play and a mountain to climb if they are to move past the group stage.
The decision remains subject to a potential appeal to the Court of Arbitration for Sport.
In a statement on Sunday, the New Zealand Olympic Committee said the sanctions show a strong signal from FIFA that indicated the significance of the breach.
"We do note, however, that while these sanctions have a punitive impact on Canada, they did not address the direct impact on the New Zealand women's football team.
"The NZOC continues to support the players and management as they prepare for their upcoming games against Colombia and France."
Canada are scheduled to play France, who top Group A on three points, on Sunday. They then take on Colombia, who like New Zealand have no points, on Wednesday.
The top two teams in each group and the two best third-ranked teams qualify for the Olympic quarter-finals.
The incident caused Priestman and the other officials involved to be suspended by Canada football, the sport's national governing body, and sent home from the Games.
The Canadian Olympic Committee removed Priestman on Thursday after her suspension by Canada football. Assistant Andy Spence will coach Canada for the remainder of the Games.
Priestman apologised on Wednesday for what had happened and said ultimate responsibility lay with her. "This does not represent the values that our team stands for," she said.
Priestman, 38, who had previously worked as women's Development Officer for England's Football Association, extended her contract in January through the 2027 Women's World Cup, having earned praise from Canada football for her "pivotal part" in the development of the women's program.
In a job advertisement on Canada football's website in January, the women's national team said it was seeking a performance analyst who was "able to operate drone" while a "working knowledge of managing training camera is preferred."
Canadian sports network TSN reported that drone use predates the 2024 Olympics, with sources telling the network the team had also filmed other opponents' training, including at the previous Olympic tournament in 2021.
There was no immediate comment from Canada football or the Canadian Olympic Committee.
On Friday, former Canadian national team players Christine Sinclair and Stephanie Labbe said players had never been shown drone footage during their time on the team.
Kaylyn Kyle, former national team player who competed at the 2012 London Olympics, said players were now paying the price for other people's actions.
"Only the players suffer for stupidity and selfishness. The amount of work that goes into prep for an OG’s (Olympic Games) to only have their dreams and hopes shattered," she said on X.
