The photographs show four German soldiers from the Nato-led International Security Assistance Force (Isaf) displaying the skull and were published by Bild newspaper on its front page under the headline, German soldiers desecrate dead person.
Franz Josef Jung, the defence minister, said: "These pictures revolt and mystify me."
In one picture, a soldier mounts it on the front of the group's patrol vehicle, which bears both the German flag and the acronym for the international force, Isaf. Another shows a soldier in a camouflage uniform and bullet-proof vest posing with the skull next to his exposed private parts.
Bild said the photographs were taken in spring 2003.
The skull was reportedly found in a gravel pit on the outskirts of Kabul, but it was unclear whether it belonged to an Afghan.
Jung has threatened to dismiss the soldiers and said they were likely to face not only a military investigation but criminal proceedings.
"People who behave like this have no place in the Bundeswehr [German army]," he said.
Jung (L) threatened to dismiss
the soldiers in the photographs
Wolfgang Schneiderhan, the general inspector of the Bundeswehr, said two soldiers had been taken in for questioning, one of whom has now left the army.
"One is still a soldier, the one is not. Both are being questioned," he said.
Schneiderhan said one of the men had come forward after seeing the pictures.
The scandal broke hours before the German cabinet was due to discuss Germany's continued involvement in Afghanistan and coincided with the defence ministry's first policy manifesto since 1994. Jung used the manifesto to state Germany's readiness to take on more international peacekeeping missions.
"It is clear that such behaviour cannot be tolerated from German soldiers. It runs counter to the values and codes of conduct we try to instill in our soldiers," Jung said.
The state prosecutor's office in Potsdam, outside Berlin, has launched a criminal investigation into the affair.
Germany is the second biggest supplier of peacekeepers to Afghanistan and holds the command of Isaf in the north of the country. About 2,750 Germans are serving with the force.
The Bundestag, or lower house of the German parliament, voted last month to extend their mandate in Afghanistan until October 2007.