King Fahd issued a royal decree removing Prince Nawaf from his post "based on his request" and appointing him as an adviser at a ministerial level, state television said on Wednesday.
The decree did not say who would replace Prince Nawaf, who has been suffering from poor health, as head of the intelligence service of the kingdom, which has been battling a wave of al-Qaida linked violence for nearly two years.
Prince Nawaf, one of King Fahd's half-brothers, underwent surgery in 2002 after suffering a brain haemorrhage.
He took over the post from Prince Turki al-Faisal shortly before the 11 September 2001 attacks, carried out mainly by Saudis.
Prince Turki, a senior member of the Saudi royal family, had overseen the intelligence apparatus for 25 years.
Supporters of al-Qaida leader Usama bin Ladin have waged a 20-month campaign of violence in the world's top oil exporter in a bid to topple the pro-Western monarchy and expel Westerners from the birthplace of Islam.
At least 170 people have been killed in the violence since May 2003.
Saudi authorities have killed or captured 20 men on a list of 26 most wanted insurgents. Riyadh says it has seriously eroded al-Qaida's forces and capabilities in the kingdom.