Indian Foreign Minister Natwar Singh has been stripped of his post after allegations that he benefited from the UN oil-for-food programme in Iraq.
Natwar Singh says he is shocked by the UN charge
The government said Mr Singh would stay in the cabinet. Premier Manmohan Singh assumes his role pending an inquiry.
Natwar Singh and the main party in India's ruling coalition, Congress, were both named in a UN report into the scandal. Both deny any wrongdoing.
India's opposition has renewed calls for Mr Singh to be sacked outright.
Natwar Singh is a close ally of Congress party chief Sonia Gandhi and as a former ambassador to Pakistan used his contacts to push forward the two countries' peace process.
Natwar Singh's removal from the post of foreign minister while his alleged misdealing is investigated came at his own request, according to a government statement.
The new minister without portfolio was summoned to an hour-long meeting with the premier on Monday and left without making any comment.
Prime Minister Manmohan Singh is taking over the foreign minister's portfolio ahead of a regional summit in Bangladesh this weekend, his spokesman said.
The BBC's Sanjoy Majumder in Delhi says the government has been deeply embarrassed by the UN report revelations and has moved quickly to contain any political fallout.
Its decision to remove Natwar Singh is an uncharacteristically swift response to what is one of the biggest crises it has faced since coming to power, our correspondent says.
Many observers had said the foreign minister's position had become untenable.
India's main opposition BJP party had demanded his resignation, saying he was unfit to stay in office. It is still pressing for him to leave the cabinet.
"He has embarrassed the government. By continuing as minister without portfolio he has earned himself a price for silence," BJP spokesman Arun Jaitley told NDTV television.
The UN report, published last Thursday, was written by the former US Federal Reserve chairman, Paul Volcker.
It said more than 2,000 firms made illegal payments to Saddam Hussein's government.
Oil-for-food was supposed to ease the burden of sanctions on Iraqis
Under the UN programme, Saddam Hussein's government could sell oil as long as the proceeds were used to buy humanitarian goods.
Natwar Singh, who held senior diplomatic posts in previous governments, was not in office in 2001 when he is alleged to have profited from Iraq oil-for-food deal.
On Saturday, Mr Singh told the NDTV television channel that the charges had no basis.
"I am dismissing [the Volcker report] here on behalf of the Congress Party and as the foreign minister of India."
On Monday, the government said a retired Supreme Court judge, RS Pathak, would head the judicial inquiry.
Former Indian UN official, Virendra Dayal, has also been appointed to gather information about the charges.