The university said that the party "encouraged a racially insensitive theme and created an environment conducive to underage consumption of alcohol."
The unregistered, off-campus party involved students posing in basketball jerseys and flashing gang signs and drinking out of watermelon cups. They also posted photos on social media with the hashtag #blackoutformlk.
Revoking recognition means the 65-year-old local chapter is no longer affiliated with ASU, the group won't be listed on the university's website and it cannot recruit members or hold on-campus meetings.
The fraternity had previously been placed on probation in 2012 and was suspended immediately after the university became aware of the party on Monday.
Upon its initial suspension after the party, the university stated, "ASU has one of the most diverse student bodies of any major university in the country, and it is unfortunate that a few individuals held an offensive party at a time when ASU, the state and the nation were celebrating Dr. King's achievements and legacy."
University officials said they still are investigating the event and deciding how to handle individual cases of student discipline.
Alex Baker, a spokesman for the national fraternity organization, said Tau Kappa Epsilon has received the university's findings and planned to release the results of its own investigation shortly.
Baker previously said the group does not condone racist or discriminatory behavior.
The Rev. Jarrett Maupin, an Arizona civil rights activist, said the party antics were outrageous and offensive. He called for the school to expel all students involved and permanently ban the fraternity from affiliation with ASU.
Founded in 1899 at Illinois Wesleyan University in Bloomington, Ill., the fraternity has about 257,000 members at 291 chapters and colonies across the United States and Canada, according to its website.
In 2012, the University of Arizona stripped its local chapter of Tau Kappa Epsilon of recognition after an investigation showed multiple instances of dangerous hazing.
In a statement, ASU President Michael Crow quoted Martin Luther King, saying, "We must remember that intelligence is not enough. Intelligence plus character – that is the goal of true education." Crow said these values are reflected in ASU's Student Code of Conduct, and any violations by students may result in disciplinary action.