Kwasi Kwarteng's departure comes amid financial and political turmoil over government policy. His successor Jeremy Hunt will be the UK's fourth finance minister in as many months.
Kwasi Kwarteng confirmed he was forced to step down as finance minister of the British government on Friday.
It means London will now have its fourth Chancellor of the Exchequer in as many months.
Former health and foreign secretary Jeremy Hunt has been appointed in his place, the prime minister's office confirmed.
UK Prime Minister Liz Truss has made a substantial U-turn on the government's mini-budget announced last month, reversing a move to scrap a planned rise in corporation tax.
Earlier media reports suggested Liz Truss would sack Kwarteng after the initial plan prompted market turmoil and a collapse in support for the ruling Conservative Party at home.
"You have asked me to stand aside as your Chancellor. I have accepted," he said in a letter to the prime minister, released following their meeting on Friday morning.
Appearing before reporters on Friday afternoon, Truss said she was "incredibly sorry" to lose her colleague, but she was putting the national interest first in order to ensure stability.
Speculation over Kwarteng's position intensified the previous evening when he suddenly left a meeting of world financial leaders in Washington 24 hours early in order to fly back to London.
A question mark still hangs over the prime minister's future.
Truss and Kwarteng have been key allies, and the controversial policies which have caused so much trouble are just as much hers as his.
Watch Liz Truss' statement from Downing Street:
Kwarteng has been at the heart of the Truss government's economic and fiscal policies which have caused havoc on financial markets, and caused political meltdown for the Tories.
His "mini-budget" announced on September 23 -- which pledged billions of tax cuts funded by borrowing -- led the pound to tumble against the dollar. The Bank of England intervened as the UK's borrowing costs soared, bringing an immediate impact on household mortgages.
The finance minister was forced into U-turns -- ditching the plan to scrap the top rate of income tax, and agreeing to bring forward the publication of the government's detailed fiscal plans.
On Friday evening, the European Commissioner for Economics Affairs said recent events in the UK highlighted the need for economic "prudence" amid a challenging global economic outlook.
"We have no lesson to teach anyone and even less in the UK," said Paolo Gentiloni. "We have things to learn on the contrary because what is happening shows how volatile the situation is and that caution must be exercised."
Opinion polls have shown a collapse in support for the Conservatives, with the opposition Labour Party opening up a 30-point lead.
A growing rebellion has seen Tory MPs -- and the odd cabinet minister -- become increasingly outspoken over the government's direction. Many accused Truss of betraying the 2019 election manifesto commitment to "level up" poorer parts of the country with her libertarian economic policies, for which they said she had no mandate.
During the Conservative leadership contest in the summer, Truss consistently said she would immediately cut taxes, despite warnings from economists and rival politicians that such a move would be very risky at a time of high inflation and market instability.
Europe has 'lessons to learn' from UK U-turn — EU Commissioner
Britain's budget U-turn shows the need for countries to be prudent in how they implement fiscal and monetary policies, the European Commission's economic affairs chief said in the wake of Friday's developments in the UK.
"We don't have lessons to give to anyone and to the UK," Paolo Gentiloni said at a news conference following talks between US and EU finance ministers at the IMF's annual meetings in Washington.
"We have lessons to learn, perhaps, because what happened shows how volatile is the situation and so how prudent we should be also with our fiscal and monetary mix," he said.