Francis had temporarily expelled Monsignor Franz-Peter Tebartz-van Elst from Limburg in October pending a church inquiry.
At the center of the controversy was the price tag for the construction of a new bishop's residence complex and related renovations. Tebartz-van Elst defended the expenditures, saying the bill was actually for 10 projects and there were additional costs because the buildings were under historical protection.
But in a country where Martin Luther launched the Reformation five centuries ago in response to what he said were excesses and abuses within the church, the outcry was enormous. The perceived lack of financial transparency also struck a chord since a church tax in Germany brings in billions a year to the German church.
The Vatican said Wednesday that the inquiry into the renovation found that Tebartz-van Elst could no longer exercise his ministry and that Francis had accepted his resignation, which was originally offered Oct. 20.
A replacement, Monsignor Manfred Grothe, currently an auxiliary bishop in Paderborn, will take over, the Vatican said, citing a statement from the diocese.
It said Tebartz-van Elst would get a new job "at the opportune time."
It added that the pope hoped that the faithful of Limburg would accept the decision with "docility and willingness to rediscover a climate of charity and reconciliation."
While the then-head of the German bishops' conference, Archbishop Robert Zollitsch, had been particularly blunt in his criticism of the bishop, Tebartz-van Elst had his defenders in Rome, which could explain the Vatican's decision to give him a second chance with a new job.
Francis has called on his priests and bishops to be models of sobriety in a church that "is poor and is for the poor."