Makhloufi stopped on the first lap Monday. He appeared to be saving energy for the 1,500 final on Tuesday where he was a likely medal contender.
The International Association of Athletics Federations says its race referee found Makhloufi guilty of "failure to compete honestly with bona fide effort."
IAAF rules state that "an athlete shall be excluded from participation in all further events in the competition."
The 24-year-old Makhloufi, who is African champion over 800, already won his heat and semifinal in the Olympic 1,500.
He is disqualified one week after four women's badminton doubles teams were disqualified for playing to lose.