The news came from an ambassador from neighbouring Thailand.
"The Thai government has learned through diplomatic channels from the Thai ambassador that the Myanmar prime minister, Khin Nyunt, was dismissed and detained under house arrest on corruption allegations," said Thai government spokesman Jakrapob Penkair.
The move took place on Monday night after the prime minister returned to the capital, Yangon, from a visit to the central town of Mandalay. The isolated Myanmar government closed its border checkpoints.
Khin Nyunt, 65, is the face of the regime overseas and backed dialogue with the detained opposition leader Aung San Suu Kyi, but appeared increasingly marginalised with the rise of hardliners within the leadership.
Senior General Than Shwe, chairman of the State Peace and Development Council (SPDC) and head of the government, is strongly against allowing Suu Kyi any role in Myanmar's political process, according to analysts.
Suu Kyi has been detained for the past 16 months and is currently under her third period of house arrest.
The sacking was the culmination of growing tensions between rival factions within the government over corruption, according to sources in Myanmar.
Khin Nyunt was appointed soon after Myanmar was condemned internationally for the detention of Suu Kyi after a violent clash between her supporters and a pro-government mob in 2003.
Myanmar has been under military
rule since 1962
The prime minister announced a seven-point "road map to democracy", but the programme has stalled amid international complaints that the process was a sham while Suu Kyi remained under house arrest.
Her National League for Democracy won national elections in 1990 but was not allowed to rule.
Myanmar has been ruled by the military since 1962, but has faced mounting international sanctions because of the lack of progress in democratic reforms.