The Vatican removed a German bishop on Wednesday because he spent 31 million euros ($43 million) of Church funds on an extravagant residence when Pope Francis was preaching austerity.
It said the atmosphere in the diocese of Limburg had become such that Bishop Franz-Peter Tebartz-van Elst could no longer carry out a "fruitful exercise" of his ministry there.
Tebartz-van Elst, dubbed the "bishop of bling," had been ordered to stay out of his diocese temporarily last October while a local Church investigation and audit into cost over-runs was made. He offered his resignation at the time.
A statement said the Vatican department that oversees bishops had now accepted his resignation after studying the results of the investigation. The German Church was expected to release details of the investigation on Wednesday.
"The Holy Father asks the faithful of the diocese of Limburg to accept the decisions of the Holy See with docility and to commit themselves to rediscovering an atmosphere of charity and reconciliation," the Vatican statement said.
Another prelate, Monsignor Manfred Grothe, has been appointed to run the diocese as an administrator on the Vatican's behalf for the time being and a position will be found for Tebartz-van Elst in due course, the Vatican said.
The Limburg affair has been an embarrassment for the Vatican as Pope Francis has been urging Church officials around the world to live simpler lives and to get closer to the poor.
Francis has several times told bishops not to live like princes. He has renounced the spacious papal apartments in the Vatican's Apostolic Palace for much more modest quarters in a Church guest house.
Last year, Francis showed his irritation over the affair by keeping the bishop waiting for eight days in Rome before receiving him in the Vatican.
Lay Catholic groups welcomed the move, calling it a chance for a new start in the diocese.
"It is very important for the Church in all of Germany to draw the necessary conclusions ... this applies especially to transparency in Church finances," said Alois Glueck, president of the Central Committee of German Catholics, the main lay association in Germany.
"Today's decision must be a signal for the whole Church, and not just in Germany," said the reform-minded lay group We Are Church.
Tebartz-van Elst has apologized for any "carelessness or misjudgement on my part," but he denies any wrongdoing.
German media, citing official documents, said the residence had been fitted with a free-standing bath that cost 15,000 euros, a conference table that cost 25,000 euros and a private chapel for 2.9 million euros.
The affair has also deeply embarrassed a German Catholic Church that had been enjoying an upswing in popularity because of Francis's wide personal appeal and after years of criticism for covering up sexual abuse cases among the clergy.
Tebartz-van Elst, 54, is still 21 years away from official retirement age in the Church. He will retain the title and rank of bishop but the Vatican will probably want to put him in a low-profile job somewhere.
The scandal has put pressure on German bishops for more financial transparency, forcing them to scrap centuries of secrecy over reporting the value of their private endowments.
Germany's church tax, collected from worshippers by the state and handed over to the churches, raised 5.2 billion euros for the Catholics and 4.6 billion euros for Protestants in 2012.