Banning a university from recruiting non-European Union students creates "an appalling image" of Britain around the world, MPs have heard.
London Metropolitan University was stripped of its highly trusted sponsor status (HTS) last week after the UK Border Agency (UKBA) said university officials failed to monitor students' attendance.
The decision, which removes London Met's right to sponsor students from outside the EU, means it can no longer authorise visas and could leave more than 2,000 undergraduates facing deportation.
The Government defended the move saying many students had no right to be in the country and accused the university of "failing to address serious and systemic failings" identified six months ago.
But Labour MP Jeremy Corbyn has claimed the withdrawal of HTS would deter foreigners from studying in the UK.
He said: "The image around the world is one that is really quite appalling because it suggests that overseas students may well be deported from this country because of a decision made by UKBA for which there is no detail given as to the basis of that decision."
The Islington North MP said the move jeopardised London Met's future and urged ministers to allow current students to finish their courses. He added: "Every university in this country has cause to be concerned by this decision from UKBA."
But, answering an urgent Commons question as MPs returned from the summer recess, Tory immigration minister Damian Green said: "UKBA found systemic failures which meant that London Met had not been able to ensure the appropriate admission and tracking of students from abroad."
Mr Green said allowing London Met to continue awarding visas would have undermined the regime. "Institutions must comply with the rules, whether they sponsor 10, 100 or 1,000 international students. This includes having a system to check that students have the right visas to study in the UK and monitoring the attendance of students," he told MPs.
He said officials would start writing to affected students on October 1, giving them 60 days to leave Britain or find another university to complete their studies.