The 17-year-old star sits on the floor with an oversized bottle of perfume between her thighs in the campaign for Marc Jacobs' Oh, Lola! fragrance.
The ad sparked several complaints, prompting officials at the U.K.'s Advertising Standards Authority (ASA) to launch an investigation.
The advertising watchdog has now deemed the ad "irresponsible" after deciding Fanning appears to be under the age of 16 in the photo.
A statement from ASA bosses reads, "We noted that the model was holding up the perfume bottle which rested in her lap between her legs and we considered that its position was sexually provocative.
"We understood the model was 17 years old but we considered she looked under the age of 16.
"We considered that the length of her dress, her leg and position of the perfume bottle drew attention to her sexuality. Because of that, along with her appearance, we considered the ad could be seen to sexualise a child.
"We therefore concluded that the ad was irresponsible and was likely to cause serious offence."