The penalty is the largest ever imposed under the legislation, and is more than twice the previous maximum.
Xanga was charged with allowing children under 13 to sign up for accounts, and disclosing personal information about them without first notifying their parents.
"Xanga.com collected, used and disclosed personal information from children under the age of 13 without first notifying parents and obtaining their consent, " the FTC said in a statement.
"The penalty is the largest ever assessed by the FTC for a Coppa violation, and is more than twice the next largest penalty."
While Xanga's sign-up form stated that children under 13 were not allowed to join, those entering birth dates corresponding to an age under 13 were still able to create accounts. Over 1.7 million accounts were created by users under the required age.
"Protecting kids' privacy online is a top priority for America's parents, and for the FTC," said FTC chairman Deborah Platt Majoras.
"Coppa requires all commercial websites, including operators of social networking sites like Xanga, to give parents notice and obtain their consent before collecting personal information from kids they know are under 13. A $1m penalty should make that obligation crystal clear."
John Hiler, chief executive at Xanga.com, said: "Before these issues came to our attention, Xanga had in place a registration system intended to screen out underage users reflecting our longstanding policy that no one under 13 is allowed to create an account.
"That system was inadequate because users were able to initially indicate that they were at least 13 years old when registering for the site, and then afterwards post a younger age on their profile.
"Because of our commitment to making the site safer for our members, we have since instituted a stronger, more comprehensive safety and compliance programme. "
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