Riken institute head, Ryoji Noyori, who jointly won the Nobel Prize for chemistry in 2001, said in a statement he will "rigorously punish relevant people after procedures in a disciplinary committee."
The punishment is expected to be meted out to lead researcher Haruko Obokata and her more experienced colleagues.
The move is a huge blow to what was touted as a game-changing discovery, published by 30-year-old Obokata along with other Japanese researchers and a US-based scientist in the January edition of British journal Nature.
But it faced questions after the respected institute, which sponsored the study, launched an inquiry last month over the credibility of its data.
Among key concerns was that researchers used erroneous images - crucial to supporting the study - which resembled those used in Obokata's doctoral dissertation in 2011.
This "amounts to phony research or fabrication," Shunsuke Ishii, head of Riken's probe committee told a press conference today.
"I will file a complaint against Riken as it's absolutely impossible for me to accept this," she said today in a statement.
The study had been billed as the third great advance in stem cells - a field that aims to reverse Alzheimer's, cancer and other crippling or lethal diseases.
It took a big hit last month after Teruhiko Wakayama, a Yamanashi University professor who co-authored the article, called for a retraction.
Nature has said it has launched its own investigation.
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