City were found to have arranged "sham" contracts with a number of commercial partners to artificially inflate the club's revenues and reduce costs over a nine-season period between 2009 and 2018.
The scheme concealed the true state of their finances and avoided breaches of Premier League and UEFA spending limits as a result.
An independent commission also found the club guilty on the majority of charges in relation to their failure to co-operate with the league's investigation.
City could be relegated, hit with a points deduction or handed a huge fine.
No sanction has yet been imposed and Abu Dhabi-backed City said they will appeal against the decision.
But Bernstein, who served as City chairman from 1998 to 2003, believes the Etihad Stadium outfit deserve the strongest possible punishment.
"It is damning beyond belief. My immediate thoughts are, should the board continue? Should the people involved be suspended immediately?" Bernstein told the BBC.
"Very, very serious. I think it's really terrible. There's a school of thought with lawyers that is deny, deny, deny, but this is a football club that is part of a league and the whole credibility of the league is at stake here.
"The sanctions cannot just be financial, so it's got to be way beyond that. If the appeal fails, Manchester City cannot stay in the league, they have to suffer. And I say that as a supporter and a fan."
'Ultimate sanction'
Lisa Nandy, the British government's Culture, Media and Sport secretary, told Channel 5 News that relegation could not be ruled out if City's appeal fails.
"I don't want to preempt any kind of appeal process, and they are entitled to a fair hearing. But what I would say is that the ultimate sanction is very serious indeed," Nandy said.
"I mean, a club can be expelled from the Premier League if these sorts of allegations are upheld, with obviously huge repercussions for everybody.
"So there are very serious sanctions, and I think the bigger issue is how do we make sure that we have clearly understood rules that are upheld and applied consistently, and that we can move quickly when they're breached."
Football finance expert Kieran Maguire said City's breaches now appeared even worse than originally suspected.
"If you Google what the word 'sham' means, I'm getting the words fake, false, fraud. It's very, very significant," he told the BBC.
"The fact that the auditors were unaware of it, there must be collusion at the club. I think it's gone far beyond the worst-case scenario that anybody initially envisaged."
Maguire offered a glimmer of hope for City's appeal, saying: "I've spoken to some sports lawyers today, just in case this did arise, and the consensus that I had coming back was that it's difficult but not impossible for Manchester City to say that ultimately this is some form of commercial dispute between two entities.
"Therefore it should be taken away from the football authorities and dealt with by the standard legal courts in the country."
But even City fan David Mooney, who runs the Blue Moon podcast, was stunned by the scale of the Premier League's damning verdict.
"I don't think there's a word in the English language that covers how damning this is," Mooney told the BBC.
"The book needs to be thrown at the club. Ultimately, if they're not successful on appeal, they've lied to the fans throughout all of this, they've lied to the football bodies. They've lied to everybody."