The sentence will bar her from running in the 2027 presidential race unless she successfully appeals.
The ruling marks a catastrophic setback for Le Pen, the National Rally (RN) party chief and a front-runner in opinion polls in the 2027 contest.
Le Pen, the RN and two dozen party figures were accused of diverting more than 4 million euros ($A6.9 million) of European Parliament funds to pay France-based staff.
They had argued the money was used legitimately and that the allegations had defined too narrowly what a parliamentary assistant does.
Judge Benedicte de Perthuis said Le Pen had been "at the heart" of the scheme.
Le Pen's removal from the race is likely to intensify a debate in France over how judges police politics.
First defeated by President Emmanuel Macron in 2017, Le Pen now presides over the single biggest party in the National Assembly.
The judges also gave Le Pen a four-year prison sentence - of which two years are a suspended sentence - and a 100,000 euro ($A173,000) fine.
She is almost certain to appeal, and neither of those penalties would be applied until her appeals are exhausted.
But her five-year ineligibility sentence kicks in immediately, via a so-called "provisional execution" measure requested by prosecutors, and will only be lifted if any appeal is upheld before the election.
She retains her parliamentary seat until her mandate ends.
Arnaud Benedetti, a political analyst who has written a book on the RN, said Le Pen's five-year ban was a watershed moment in French politics that would reverberate across parties and through the electorate.
"This is a seismic political event," he said. "Inevitably, it's going to reshuffle the pack, particularly on the right."
Appeals in France can take months or even years.
RN President Jordan Bardella, Le Pen's 29-year-old right-hand man, now looks set to become the party's de facto candidate for the 2027 election.
While he has helped expand the RN's appeal among younger voters, experts say it's unclear whether he has the experience to win over the broader electorate the RN needs to secure victory in 2027.
"I am not sure that Jordan Bardella's political proposition is mature enough to be able to compete credibly in the presidential election," Benedetti said.
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