World governing body FIFA on Monday confirmed Simunic's ban will start at the World Cup in Brazil, and also announced he will be banned from entering the stadium for any of the country's matches.
Simunic has also been ordered to pay a fine of 30,000 Swiss francs (£20,700).
The ban was branded "draconian" by Croatia Football Federation (HNS) executive chairman Damir Vrbanovic, who said the HNS would support an appeal but was already planning for a World Cup without the 105-times capped Simunic.
The ban could signal the end of the 35-year-old's international career.
The incident came after Croatia's World Cup qualifying play-off against Iceland in Zagreb on November 19, a match Croatia won 2-0 in order to secure their place in Brazil.
The Dinamo Zagreb captain was captured on video using a microphone to lead chants which were found to have associations with Croatia's former pro-Nazi Ustase regime.
A FIFA statement said: "The committee took note that the player, together with the crowd, shouted a Croatian salute that was used during World War II by the fascist 'Ustase' movement.
"As a consequence, the committee agreed that this salute was discriminatory and offended the dignity of a group of persons concerning, inter alia, race, religion or origin, in a clear breach of article 58 par. 1a) of the FIFA disciplinary code.
"After taking into account all of the circumstances of the case, and particularly given the gravity of the incident, the committee decided to suspend the player for 10 official matches."
After disciplinary proceedings were opened against Simunic on November 22, a Dinamo statement denied any intent to make a political statement but confirmed that Simunic had used the phrase: "For the homeland". Croatian fans replied by shouting: "Ready".
The 35-year-old, who was born and grew up in Australia, also said at the time he was horrified to have been accused of discrimination.
"The thought that anyone could associate me with any form of hatred or violence terrifies me," he said in a statement on Dinamo's official website.
"If anyone understood my cries differently, or negatively, I hereby want to deny they contained any political context.
"They were guided exclusively by my love for my people and homeland, not hatred and destruction."
Following the announcement of the ban, Vrbanovic suggested Simunic was being made an example of in order to send a message to others.
"We are shocked by the decision of FIFA with regard to penalties for Simunic, which endangers the player's representative career," he said in a statement on the HNS website. "We will give our full support to our team members in the likely appeal of this decision, but we must be honest and admit that this sentence means that Simunic will not be able to participate in the World Cup in Brazil.
"Although we know that through his behaviour he did not want to hurt anybody, FIFA is obviously hoping that such a draconian penalty sends a strong message."
Croatia coach Niko Kovac added: "I was unpleasantly surprised, shocked and disappointed by FIFA's punishment for Josip Simunic. I am primarily sorry for Josip, who will miss the World Cup. I have known him for a long time as a player and as a man, and I am absolutely sure that in no way did he want to hurt anyone."
At the same time, FIFA informed the HNS that Mario Mandzukic, sent off in the same match against Iceland, had been given a one-match ban.
"We knew that Mandzukic would be punished for this incident, so it is good that is only for one match," Kovac added.
The HNS said it had been fined 70,000 Swiss francs (£48,300) in relation to the two incidents.