It is Google’s second setback in the country in less than a month and it says it will appeal.
The Korea Fair Trade Commission (KFTC, but not Kentucky Fried Takeaway Chicken) said Google's contract terms with device makers amounted to an abuse of its dominant market position that restricted competition in the mobile OS market.
KFTC Chairperson Joh Sung-wook said the decision provides Google with an opportunity to restore future competitive pressure in the mobile OS and app market markets.
The antitrust regulator said this could be the ninth-biggest fine it has ever imposed.
KFTC said Google hampered competition by making device producers abide by an "anti-fragmentation agreement (AFA)" when signing key contracts with it regarding app store licences.
Under the AFA, manufacturers could not equip their handsets with modified versions of Android, known as "Android forks". That has helped Google cement its market dominance in the mobile OS market, the KFTC said.
Under the ruling, Google is banned from forcing device makers to sign AFA contracts, allowing manufacturers to adopt modified versions of Android OS on their devices.
In one instance, Samsung launched a smartwatch with a customised OS in 2013 but switched to a different OS after Google regarded the move as an AFA violation, KFTC said.
The fine comes on the day that an amendment to South Korea's Telecommunications Business Act - popularly dubbed the "anti-Google law" - came into effect.
The bill was passed in late August and it bans app store operators such as Google from requiring software developers to use their payment systems. The requirement had effectively stopped developers from charging commission on in-app purchases.