Blatter addressed the problem while attending a gala dinner in London Saturday night to mark the 150th anniversary of the English Football Association.
Midfielder Yaya Toure, who's from the Ivory Coast, had complained to the referee during a match last Wednesday between the Manchester City team and Moscow CKSA, saying he was subjected to racial abuse by home fans.
The referee failed to follow guidelines and stop a match to warn Russian fans to stop their chants.
Michel Platini, president of the Union of European Football Associations, now wants to know why the referee did not issue a warning to fans, following UEFA protocol, and has ordered an investigation.
"We have to stop it. We need the courage to do it," Blatter said in London. "It has been decided by the FIFA Congress that it is a nonsense for racism to be dealt with, with fines, you can always find money from somebody to pay them.
"It is a nonsense to have matches played without spectators because it is against the spirit of football and against the visiting team, it is all nonsense.
"What we shall do is be very tough, we need to eliminate teams from a competition or deduct points. Only by such decisions is it possible to go against racism and discrimination. If we don't do that it will go on and go on."
Blatter praised the world's oldest national football association for creating the "perfect" environment for matches by eradicating the hooliganism and racism that once blighted the game here.
FA President Prince William, the second in line to the British throne, told the dinner that there is "sadly more work to do" still to combat racism in soccer.