Francis had temporarily expelled Monsignor Franz-Peter Tebartz-van Elst from Limburg in October pending a church inquiry.
At the centre of the controversy was the price tag for the construction of a new bishop's residence complex and related renovations.
Mgr 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 the perceived lack of financial transparency struck a chord since a church tax in Germany brings in billions a year to the German church.
The Vatican said the inquiry into the renovation found Mgr Tebartz-van Elst could no longer exercise his ministry and Francis had accepted his resignation, which was originally offered on October 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 Mgs Tebartz-van Elst would get a new job "at the opportune time".
It added the Pope hoped that the faithful of Limburg would accept the decision with "docility and willingness to rediscover a climate of charity and reconciliation".