The department has a remit to widen access to university
England's department for higher and further education has been scrapped, just two years after its creation.
The prime minister has created a new Department for Business, Innovation and Skills under Lord Mandelson.
Universities do not figure in the name of the new department, whose remit is "to build Britain's capabilities to compete in the global economy".
Number 10 said it would invest in a higher education system committed to widening participation.
The role would include "maintaining world class universities, expanding access to higher education, investing in the UK's science base and shaping skills policy and innovation".
"It also puts the UK's further education system and universities closer to the heart of government thinking about building now for the upturn," the statement said.
The new department will be headed by Lord Mandelson.
John Denham, the secretary of state for the former Department for Innovation, Universities and Skills (Dius), has become Communities Secretary.
Mr Denham had run Dius since June 2007, when it was created from the division of the education department, when Gordon Brown became prime minister.
Dius had been created as a separate department for higher and further education - with the remainder of education becoming the Department for Children, Schools and Families, currently headed by Ed Balls.
The schools minister, Jim Knight, has also moved in the reshuffle, becoming minister of state for employment in the Department for Work and Pensions.
In response to the latest shake-up, the further education organisation, the Association of Colleges, said that "in the middle of a recession and with less than a year to run to an election it's unhelpful to introduce this degree of change in terms of ministerial responsibility".
Diana Warwick, head of the higher education body, Universities UK, said: "We are looking forward to an early meeting with Lord Mandelson."
"We want to work with him to continue the momentum in developing a higher education system that will equip people with the knowledge and skills to compete in a global economy and enhance Britain's existing world-class research base."
Pressure on places
The Million+ group, representing new universities, said that the department would have to address "immediate challenges".
"In particular the tens of thousands of potential students who will be turned away because there are no places for them at university this year."
This refers to a problem facing the new department this summer if, as has been forecast by universities, there is a shortfall of places following a surge in applications.
The UCU lecturers union expressed its disappointment at the scrapping of Dius.
General secretary Sally Hunt said she was "very concerned" that the "merger seems to signal that further and higher education are no longer considered important enough to have a department of their own".
"The fact they have been lumped in with business appears to be a clear signal of how the government views colleges and universities and their main roles in this country."
It is not yet clear how the new department will work in terms of devolved government, as the defunct department was an England-only structure.