The ad, for Marc Jacobs "Oh, Lola!" fragrance, featured Fanning, the child star of War of the Worlds and I am Sam wearing a short dress and holding an oversized bottle of the scent in her lap.
Four readers complained that the photograph -- which appeared in two British magazines in August -- was "offensive and irresponsible," for showing Fanning, 17, "in a sexualized manner."
Britain's advertising regulator, the Advertising Standards Agency (ASA) agreed with the complaints, and has banned the picture from use in the UK.
Coty UK, the perfume's manufacturer insisted that the ad "did not show any private parts or sexual activity" and claimed that it was "provoking, but not indecent."
But the ASA ruled that Fanning "was holding up the perfume bottle... in her lap between her legs and we considered that its position was sexually provocative."
In a statement, it said that while it accepted that Fanning was 17, "we considered she looked under the age of 16," and that her outfit and pose "drew attention to her sexuality."
"Because of that... we considered the ad could be seen to sexualize a child. We therefore concluded that the ad was irresponsible and was likely to cause serious offense."
It is not the first time the ASA has banned advertisements featuring Hollywood stars -- in July, the watchdog ruled against a make-up ad starring Julia Roberts, on the grounds it had been airbrushed too heavily.