The former head of the Yugoslav army, Momcilo Perisic, has denounced the decision to dismiss him, saying it was illegal.
In a statement, General Perisic said it was done without proper consultation, and that it was politically motivated.
General Perisic has in the past criticised President Slobodan Milosevic's handling of the crisis in Kosovo.
Correspondents say Mr Milosevic's decision appears to be part of a purge aimed at removing anyone expressing dissent and replacing them with loyalists.
General Perisic also rejected the offer to work as defence adviser, saying he wanted to remain at the disposal of the army, the people and the state.
From the newsroom of the BBC World Service