Liz Truss has sacked Kwasi Kwarteng from his cabinet role of chancellor and named Jeremy Hunt as his replacement after the government was forced to rip up key sections of the recent "mini-budget" in the wake of two weeks of economic chaos.
Chris Philp, chief secretary to the Treasury, has also been removed as part of a reshuffle of Truss's top team and replaced with Cabinet Office minister Edward Argar.
In a letter to Truss confirming his sacking, Kwarteng wrote: "You have asked me to stand aside as your chancellor. I have accepted.
"When you asked me to serve as your chancellor, I did so in full knowledge that the situation we faced was incredibly difficult, with rising global interest rates and energy prices. However, your vision of optimism, growth and change was right.
"As I have said many times in the past weeks, following the status quo was simply not an option. For too long this country has been dogged by low growth rates and high taxation – that must still change if this country is to succeed."
No.10 confirmed Hunt's appointment as chancellor via Twitter just after 2pm.
Truss will give a press conference this afternoon in which she is widely expected to announce a further concession on the "mini-budget" by rowing back on a pledge to scrap a planned rise in corporation tax. Government bonds appeared to have recovered slightly in the imminent wake of Kwarteng's sacking.
In his resignation letter, Kwarteng added that the economic situation had "changed rapidly" since announcing his mini-Budget in September, including a significant intervention by the Bank of England after the pound tanked and the price of government debt soared.
"In response, together with the Bank of England and excellent officials at the Treasury we have responded to those events, and I commend my officials for their dedication," he said.
"It is important now as we move forward to emphasise your government's commitment to fiscal discipline. The Medium-Term Fiscal Plan is crucial to this end, and I look forward to supporting you and my successor to achieve that from the backbenches."
The now-former chancellor said he continued to believe in Truss's "vision", which he has long-shared during more than a decade working together in politics.
"We have been colleagues and friends for many years. In that time, I have seen your dedication and determination," he wrote.
"I believe your vision is the right one. It has been an honour to serve as your first Chancellor.
"Your success is this country's success and I wish you well."
In her response to Kwarteng, Truss said she was "deeply sorry" to lose him from government.
"We share the same vision for our country and the same firm conviction to go for growth," she wrote.
"You have been chancellor in extraordinarily challenging times in the face of severe global headwinds."
Truss added the energy policies announced in the mini-budget would "stand as one of the most significant fiscal interventions in modern times".
She added: "Thanks to your intervention, families will be able to heat their homes this winter and thousands of jobs and livelihoods will be saved."
Truss also paid tribute to Kwarteng for other measures announced in the mini-budget, including the National Insurance Contributions cut, and plans to set up new investment zones around the country.
Despite Kwarteng suggesting he had been sacked from the cabinet, Truss said she "deeply respects the decision" he had made.
"You have put the national interest first," she added.
"I know that you will continue to support the mission that we share to deliver a low tax, high wage, high growth economy that can transform the prosperity of our country for generations to come."
Kwarteng returned early from a trip to the US on Friday morning, where he held meetings with fellow finance ministers, as anger grew among his own party over his growth plan announced last month.
His removal from the post after just 38 days makes him the second shortest serving chancellor, with only Iain Macleod, who died after 30 days in the job, holding the post for less time.
One Whitehall source told CSW's sister title PoliticsHome that the removal of Kwarteng and Philp were an attempt by Truss to "put clear blue water between the shit show and her".
But there is significant criticism from MPs who believe that because Truss put tax cuts at the heart of her leadership pledge, it is impossible for her to disentangle herself from responsibility for the "mini-Budget" even having sacked Kwarteng.
"This budget was the PM's responsibility and hers alone as first lord of the Treasury," a senior Tory MP told PoliticsHome.
"Her vision, her measures and her appalling timing steamrollering cuts when the country can't afford them and cratering family finances across the land."
Rachel Reeves MP, Labour’s shadow chancellor, said: "Changing the chancellor doesn't undo the damage that's already been done.
"It was a crisis made in Downing Street. Liz Truss and the Conservatives crashed the economy, causing mortgages to skyrocket, and has undermined Britain’s standing on the world stage."
She insisted that an entire change of government, rather than changes in the cabinet were needed to "get out of this mess".
The government is widely expected to make a second major U-turn on their economic plans, opting to keep the planned corporation tax rise due to come into force next year, after initially planning to scrap the rise.
Earlier this month, Truss announced the government was also not pressing ahead with their plans to scrap the top 45 per cent rate of income tax following a major backlash.
It will put further pressure on Liz Truss, who strongly supported the chancellor's mini-budget, which she said was crucial to shoring up the UK economy.
But the plans triggered chaos in the UK markets with major fluctuations in the value of the pound, and a significant drop in the value of UK government bonds, which forced the Bank of England to make several major interventions to shore up pension funds exposed to the bonds.
Speaking on Thursday, Kwarteng had rejected suggestions he could be removed from post if the government were forced to make further U-turns, saying he was "100 per cent not going anywhere".
Truss's plans to cut taxes had also played a major part of her leadership pitch to Conservative members during summer meaning the decision to sack Kwarteng will raise further questions over her future as Prime Minister.
The party has also suffered a severe drop in support, with some polls giving Labour a 33 point lead over Truss's party.
John Johnston is a reporter for CSW's sister title PoliticsHome, where this story first appeared. Additional reporting by Adam Payne.