Users will need Full Write People permission to preform this task.
Users with this permission also have the Limited Read People and Limited Write People permission.
Excluding a Profile from the People Directory
First locate the profile you want to modify.
On the person's profile > Select the Actions Button in the top right
> Choose "Update Privacy Settings"
Finally > Mark the Profile as "Unlisted" and save your changes.
Profiles can also be unlisted by custom criteria via the Directory Settings.