The New York Times said Bunnatine Greenhouse had worked in military procurement for 20 years and for the past several years had been the chief overseer of contracts at the Army Corps of Engineers, the agency that has managed much of the reconstruction work in Iraq.
The demotion removes her from the elite Senior Executive Service and reassigns her to a lesser job in the corps' civil works division, the report said on Monday.
Greenhouse's lawyer, Michael Kohn, called the action an "obvious reprisal" for the strong objections she raised in 2003 to a series of corps decisions involving the Halliburton subsidiary Kellogg, Brown & Root which has garnered more than $10 billion for work in Iraq, The Times said.
Vice-President Dick Cheney was chief executive at Halliburton before he joined President George Bush's election campaign in 2000.
"She is being demoted because of her strict adherence to procurement requirements and the Army's preference to sidestep them when it suits their needs," the newspaper quoted Kohn as saying in an interview.
US Vice-President Dick Cheney
was formerly CEO of Halliburton
He also said the army had violated a commitment to delay Greenhouse's dismissal until the completion of an inquiry by the Pentagon's inspector-general.
Good past reviews
Carol Sanders, spokeswoman for the Army Corps of Engineers, said the personnel action against Greenhouse had been approved by the Department of the Army, the paper said.
In a memorandum dated 3 June 2005, the commander of the corps, Lieutenant-General Carl Strock, said the administrative record "clearly demonstrates that Ms Greenhouse's removal from the SES is based on her performance and not in retaliation for any disclosures of alleged improprieties that she may have made".
Kohn said Greenhouse had initially received stellar performance ratings, the paper pointed out.
But her reviews became negative at roughly the time she began objecting to decisions she saw as improperly favouring Kellogg Brown & Root, he said.