The navy claims that Timothy McVeigh has violated the policy on homosexuals in the military known as "don't ask, don't tell".
Civil rights campaigners say the American government should not have been allowed access to private subscription details.
Those campaigning for privacy on the Internet say this incident should concern every subscriber to America Online, a service which allows around 10 million computer users access to the World Wide Web.
The sailor involved referred to himself online only as Tim, and in his private application form listed his marital status as gay.
Tim turned out to be Timothy McVeigh, the highest ranking enlisted man aboard a nuclear submarine stationed in Hawaii.
Navy investigators tracing a message say they uncovered his identity by simply requesting the details from the largest US online service America Online.
The computer service has denied the claim.
'Homophobic paranoia'
Mr McVeigh joined the United States Navy in 1979. He rose quickly through the ranks and was promoted to his present position in 1997. He has been honoured with several medals for his naval work.
Mr McVeigh believes that the Navy's decision is unfair. He intends to fight with support from the Servicemembers' Legal Defense Network.
Mr McVeigh has also launched his own Website where he says that the action against him is "homophobic paranoia at its peak".
He adds: "I believe that this entire matter has been blown out of proportion by Submarine Squadron Three. They have made it an issue.
"If any little hint of 'possible' homosexuality will get you falsely accused of sodomy and indecent acts, investigated, processed for separation, and wrongfully kicked out of the military, then there is something radically wrong with the navy and our government.
"We, as a people, need to do something to stop our government from unfair practices."
Civil rights advocates are saying the service has broken its guarantee of privacy and that the government should never have asked for the man's identity.
They believe the incident provides alarming evidence of "cybersnooping" on American citizens.
United States Navy
United States Navy: Information on homosexual policy
American Online: Privacy policy for Internet users
Timothy McVeigh's Website
Servicemembers' Legal Defense Newtwork
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