Ukrainian President Petro Poroshenko has sacked Ihor Kolomoisky, the billionaire governor of Dnipropetrovsk region.
Poroshenko sacked the governor after a group of armed men, suspected of being linked to the oligarch, briefly took over a state-owned oil company in Kiev.
He was allegedly displeased that the Ukrainian parliament passed new laws that weakened his influence.
The dispute could impact on the government's war with pro-Russian rebels in eastern Ukraine and raised fears of an escalation between the two parties.
Kolomoisky has been attributed as playing a key role in halting the advance of the rebels in eastern Ukraine and bringing order to the region of Dnipropetrovsk.
The Ukrainian President released a statement naming Valentyn Reznichenko as the new acting governor for the region, which should remain "a bastion of Ukraine in the east and protect the peace".
The armed men entered the offices of Ukrnafta this week, after the government passed legislation that would have effectively removed Kolomoisky's control of the oil and gas giant. They left after the government issued an ultimatum.
Kolomoisky said the men were from a private security firm and that they had acted to halt an illegal takeover at the company. The oligarch owns a 42% stake in the company, with the rest being owned by the state.