The former US commander in charge of the Iraqi prison at the centre of the abuse scandal has been demoted on the orders of President George W Bush.
Karpinski is the only general to be disciplined over Abu Ghraib
Army Reserve Brigadier General Janis Karpinski has been reduced in rank to colonel, a US army statement said.
She was found guilty of dereliction of duty and accused of concealing a past shoplifting arrest, the army added.
Gen Karpinski is the highest-ranking US soldier to be disciplined over prisoner abuse at Baghdad's Abu Ghraib prison.
Other high-ranking officers, including former commander of US troops in Iraq Lt Gen Ricardo Sanchez and three of his top aides, have been cleared over the scandal.
Gen Karpinski has insisted she had been made a "convenient scapegoat" for decisions sanctioned above her and that she did not have final authority over the prison.
She headed the military police unit that ran the facility when inmates were maltreated.
Nine junior US soldiers have been charged in connection with the abuse at the prison, and seven of them have already been convicted.
On Wednesday a judge at the trial of Pte Lynndie England, whose photographs sparked the scandal in the first place, declared a mis-trial and entered a not guilty plea on her behalf.
Gen Karpinski's demotion followed an investigation by the army's inspector general which substantiated allegations of leadership failures, the army said.
The move to strip her of her rank needed the approval of the US president.
But the general was absolved of any specific actions that contributed directly to the abuse.
"Though Brigadier General Karpinski's performance of duty was found to be seriously lacking, the investigation determined that no action or lack of action on her part contributed specifically to the abuse of detainees at Abu Ghraib," the army said.
"They're saying she's the only senior leader that had any part in this, but they're saying she didn't have a direct part in it," her lawyer Neal Puckett told the Washington Post.
"I think they're trying to have it both ways. They are severing the chain of command right at her eyeball level, and not letting it go higher."
The shoplifting allegation meanwhile related to her arrest on suspicion of stealing cosmetics from a shop at an air force base, and then failing to report the incident to her superiors, army officials said.
In its latest statement the army said disciplinary action has also been taken against five officers besides Janis Karpinski, but it did not identify them.
It said one colonel and two lieutenant colonels had been given unspecified administrative punishment, and two other lieutenant colonels had received letters of reprimand.