Chambers, 25, tested positive for tetrahydrogestrinone (THG) in an out-of-competition test last August. Four American track and field athletes have also tested positive for the steroid, which was discovered in a Los Angeles laboratory last year.
The sprinter's lawyer said he was considering an appeal to the Court of Arbitration for Sport.
In a statement released on Tuesday, UK Athletics said the ban, which runs from November, 2003, followed a disciplinary hearing last week. Chambers denied knowingly taking a banned substance.
"UK Athletics is proud of the fact that we conduct a full programme of in and out-of-competition testing alongside targeted testing to ensure we do all we can to protect those athletes who compete fairly," said chief executive David Moorcroft.
"We are mindful of the fact that this may lead to adverse findings and that publicity resulting from a positive finding can hurt the sport, but we feel this is a price worth paying to keep the sport clean."
At a later news conference, Moorcroft said the Chambers' verdict was a test case for THG.
"We are at the frontfront of a world wide issue," he said. "I'm relieved that a verdict has been reached. I'm deeply disappointed for Dwain but it's the right verdict. We all must now move on."
Graham Shear, Chambers' lawyer, issued a statement saying that the athlete continued to assert his innocence.
"The decision of the tribunal is being studied in detail for the purposes of considering a possible appeal to the Court of Arbritration for Sport," he said.
OLYMPIC BAN
The independent Lausanne-based court is recognised by the International Association of Athletics Federations (IAAF) as the final court of appeal in drugs cases.
IAAF spokesman Nick Davies welcomed the decision. "A two-year ban is pretty emphatic. It's basically the end for most careers. In this case it's appropriate," he told Sky Sports.
Craig Reedie, president of the British Olympic Committee, said he considered the case had been properly handled. Chambers is banned from the Olympics for life.
THG is prohibited by the International Association of Athletics Federations (IAAF) because it is related to the banned steroid gestrinone.
It was discovered by scientists at the Olympic Analytical Laboratory in Los Angeles last year after a syringe containing the new substance was handed to the U.S. Anti-Doping Agency (USADA) by an unidentified man claiming to be a well-known athletics coach.
The USADA said it believed the drug had been developed in the California-based BALCO laboratory which was raided last September by agents from the U.S. Internal Revenue Service criminal investigations unit and the San Mateo County Narcotics Task Force.
Forty athletes were subpoeaned to appear before a federal jury which this month indicted BALCO owner Victor Conte, his vice-president Jim Valente, Chambers's coach Remi Korchchemny and Greg Anderson, the personal trainer for baseball hitter Barry Bonds.
U.S. shot put champion Kevin Toth, hammer thrower John McEwen, American women's hammer champion Melissa Price and middle-distance runner Regina Jacobs are the four Americans who have tested positive. Their cases will be considered by USADA.
Chambers won the European 100 title in Munich in 2002. Later that year he set a personal best of 9.87 seconds while finishing second to American Tim Montgomery at the grand prix final in Paris. Montgomery clocked a world record 9.78 seconds.
