Bashar al-Assad, the Syrian president, replaced Shara with Walid Muallem, currently deputy foreign minister, in a cabinet shake-up that left the key posts of prime minister and defence minister unchanged.
Bassam Abdelmajid was named interior minister.
He replaces Ghazi Kanaan, the former Syrian intelligence chief in neighbouring Lebanon, who committed suicide in October.
Shara, 68, has been foreign minister since 1984 and has been a fierce critic of Israel and its occupation of the Golan Heights.
Khaddam, a hardline Baath party member, quit last year and has since accused Damascus of involvement in the murder a year ago of Rafiq al-Hariri, the former Lebanese prime minister.
Syria's official daily Ath-Thawra said in January that Khaddam, now in exile in Paris, would be tried for high treason.
He would also be investigated for corruption and his assets seized. Al-Shara is seen as a pragmatic but tough negotiator.
Al-Shara enjoyed the confidence of the current president's father, Hafez al-Assad, who entrusted him with secret negotiations launched in 1991 with Israel.
Abdul Halim Khaddam would be
tried for treason, reports say
Elegant and speaking perfect English, Shara was born in 1938 in Deraa district, 100km south of Damascus.
He received a degree in English literature at Damascus University in 1963 and headed the Syrian Airlines office in Britain from that year until 1976.
During his time in Britain he also studied and obtained a degree in international law at London University.
Shara joined the diplomatic corps in 1977 as ambassador to Rome, a post he held for three years before becoming minister of state for foreign affairs.
In 1983 he briefly took over as acting information minister before being appointed foreign minister the following year.
Khaddam, 73, a leading hardliner in the Syrian hierarchy, was a Baath Party official in the 1960s and became foreign minister and deputy prime minister in the 1970s.
He took the post of vice president in 1984.
Now living under police protection in France, Khaddam has accused al-Assad of personally threatening al-Hariri a few months before his assassination on 14 February last year.
Al-Assad is accused of
threatening Rafiq al-Hariri
The popular five-time prime minister was killed in a bomb blast in Beirut for which a UN probe has implicated Syrian intelligence.
"I know the facts because I myself heard Bashar al-Assad. But the assessment of the weight of these threats and whether Bashar al-Assad was involved or not [in al-Hariri's murder] is a matter for the investigators," Khaddam told French radio RTL.
"One day Bashar called in Rafiq Hariri in the presence of security officers and gave him a hard time. He accused him of acting against Syria and for the election in Lebanon of an anti-Syrian president. He said it was he who made the decisions and added: 'Anyone who goes against my decisions, I liquidate him'."