The Somali President, Abdullahi Yusuf Ahmed, has sacked PM Nur Hassan Hussein and the interim government.
At a news conference in Baidoa, the president said Mr Hussein, who was sworn into office in November 2007, had failed to bring security to Somalia.
"The government has been paralyzed by corruption, inefficiency and treason," Yusuf said, adding that he will name a new prime minister in three days.
The move follows tension between the two in recent months over attempts to deal with the Islamist-led opposition.
However Mr Hussein told AFP news agency that the president alone did not have the power to remove him from office.
Somalia has not had a functioning national government since President Mohamed Siad Barre was overthrown in 1991.
The current transitional government, faced with an insurgency, is dependent on international aid and Ethiopian military support to function.
The prime minister, Nur Hassan Hussein, said he will challenge the move.
The president needs parliament's approval to remove the prime minister, but Yusuf said that legally there is no government in place anyway because two-thirds of ministers have already resigned.
"The president was speaking in his usual personal capacity, which is always contrary to the country's existing rules and regulations," Hussein told The Associated Press.
Somalia is at a dangerous crossroads.
Ethiopia, which has been protecting the Somali government, recently announced it would withdraw its troops by the end of this month.
This will leave the government vulnerable to Islamic insurgents, who have captured most of southern Somalia and move freely inside the capital, Mogadishu.
In the past they have brought a semblance of security to a chaotic country, but have done it by carrying out public executions and floggings.
On Saturday, fighters loyal to the most powerful arm of the Islamist movement - al-Shabab - publicly executed by firing squad two men accused of killing their parents in southern Somalia.
Civilians have borne the brunt of the violence surrounding the insurgency, with thousands killed or maimed by mortar shells, machine-gun crossfire and grenades.
The United Nations says there are around 300,000 acutely malnourished children in Somalia, but attacks and kidnappings of aid workers have shut down many humanitarian projects.
The lawlessness, meanwhile, has allowed piracy to flourish off the coast, with bandits taking in about $30 million in ransoms this year alone.
Somalia has urged the United Nations to send a peacekeeping force, which the U.N. Security Council said is possible if the country can improve its security situation.
The United States worries Somalia could be a terrorist breeding ground, and accuses al-Shabab - "The Youth" - of harboring the al-Qaida-linked terrorists who allegedly blew up the U.S. embassies in Kenya and Tanzania in 1998.
In the past, international forces have not fared well in Somalia.
A U.N. peacekeeping force met disaster in 1993, when militiamen shot down two U.S. Army Black Hawk helicopters and battled U.S. troops, killing 18.
The troops from Ethiopia - the region's military powerhouse - have come under regular attack since arriving two years ago.
They have been largely confined to urban bases, as have the 2,600 African Union peacekeepers so far sent for a mission that was approved at 8,000 members.
