Gavin Williamson has strenuously denied he leaked information from the National Security Council as calls are being made for a police inquiry.
Downing Street said the PM had “lost confidence in his ability to serve” and Penny Mordaunt will take on the role.
Mr Williamson, who has been defence secretary since 2017, “strenuously” denies leaking the information.
In a meeting with Mr Williamson on Wednesday evening, Theresa May told him she had information that provided “compelling evidence” that he was responsible for the unauthorised disclosure.
In a letter confirming his dismissal, she said: “No other, credible version of events to explain this leak has been identified.”
Responding in a letter to the PM, Mr Williamson said he was “confident” that a “thorough and formal inquiry” would have “vindicated” his position.
“I appreciate you offering me the option to resign, but to resign would have been to accept that I, my civil servants, my military advisers or my staff were responsible: this was not the case,” he said.
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The inquiry into the National Security Council leak began after the Daily Telegraph reported on the Huawei decision and subsequent warnings within cabinet about possible risks to national security over a deal with Huawei.
BBC political editor Laura Kuenssberg said sources close to the former defence secretary had told her Mr Williamson did meet the Daily Telegraph’s deputy political editor, Steven Swinford, but, she pointed out “that absolutely does not prove” he leaked the story to him.
According to Sky News defence and security correspondent Alistair Bunkall, Mr Williamson swore on his children’s lives that he was not responsible for the leak.
Security correspondent Frank Gardner said the BBC had been told “more than one concerning issue” had been uncovered regarding Mr Williamson during the leak inquiry and not just the Huawei conversation.
Downing Street has made a very serious accusation and is sure enough to carry out this sacking.
For the prime minister’s allies, it will show that she is, despite the political turmoil, still strong enough to move some of her ministers around – to hire and fire.
Mr Williamson is strenuously still denying that the leak was anything to do with him at all.
There is nothing fond, or anything conciliatory, in either the letter from the prime minister to him, or his reply back to her.
The National Security Council (NSC) is made up of senior cabinet ministers and its weekly meetings are chaired by the prime minister, with other ministers, officials and senior figures from the armed forces and intelligence agencies invited when needed.
It is a forum where secret intelligence can be shared by GCHQ, MI6 and MI5 with ministers, all of whom have signed the Official Secrets Act.
There has been no formal confirmation of Huawei’s role in the 5G network and No 10 said a final decision would be made at the end of spring.
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Huawei has denied there is any risk of spying or sabotage, or that it is controlled by the Chinese government.
Mrs May said the leak from the meeting on 23 April was “an extremely serious matter and a deeply disappointing one”.
Theresa May’s letter to Gavin Williamson
It is vital for the operation of good government and for the UK’s national interest in some of the most sensitive and important areas that the members of the NSC – from our armed forces, our security and intelligence agencies, and the most senior level of government – are able to have frank and detailed discussions in full confidence that the advice and analysis provided is not discussed or divulged beyond that trusted environment.
“That is why I commissioned the cabinet secretary to establish an investigation into the unprecedented leak from the NSC meeting last week, and why I expected everyone connected to it – ministers and officials alike – to comply with it fully. You undertook to do so.
“I am therefore concerned by the manner in which you have engaged with this investigation.”
Foreign Secretary Jeremy Hunt said the prime minister had no alternative but to sack Mr Williamson, but he said on a personal level he was “very sorry about what happened”.
When asked whether there should be a criminal inquiry into the NSC leak, new defence secretary Ms Mordaunt said: “The prime minister has made her decision.
“What I’m focused on is getting on with the job.”
Labour’s deputy leader Tom Watson has called for a police inquiry to investigate whether or not Mr Williamson breached the Official Secrets Act.
That sentiment was echoed by former national security adviser Lord Ricketts. He told BBC Newsnight that on the face of it, the leak was a breach of the official secrets act and therefore the police ought to be considering an inquiry.
Lib Dems leader Vince Cable said Mr Williamson’s sacking was “absolutely extraordinary” and the PM did it in “such a forthright way”.
He added that he believed it was “clearly a police matter”. His deputy, Jo Swinson, has asked the police to open an investigation.
But Scotland Yard said in a statement that it was a matter for the National Security Council and the Cabinet Office, and it was not carrying out an investigation.
Defence Committee chairman Julian Lewis told the BBC that Mr Williamson’s sacking was a “loss” when looked at “purely” from the point of view of defence.
He said he thought “very highly” of Ms Mordaunt – the first woman to take the role of defence secretary.
Rory Stewart has been confirmed as the new international development secretary, taking over from Ms Mordaunt.
Mr Stewart said he believed the prime minister and national security adviser had “made the right decision” in sacking Mr Williamson.