Yar'Adua has since returned home but remains too ill to lead the country.
The dissolution of the cabinet does not automatically lead to elections, which are scheduled for 2011.
But the powerful governors of Nigeria's 36 states, senior governing party officials and other lobby groups will now put forward nominees for new ministers.
Jonathan will decide on a shortlist which will then be screened and approved by the Senate.
The dissolution comes only weeks after the president sacked his national security adviser and demoted the former justice minister.
The dismissal of the security aide followed unrest near the central city of Jos in Plateau state that claimed hundreds of people.
On Wednesday at least 13 people were massacred by Muslim Fulani herdsmen near Jos and the attack, the latest in a series, targeted a Christian community.
Al Jazeera's Yvonne Ndege, reporting from Abuja, the Nigerian capital, said Jonathan's move is seen as an attempt to assert his presidential authority.
"The cabinet has been packed with a raft of appointees - appointees of Yar'Adua - and many people thought the acting president really hasn't been able to assert his authority or gain the credibility that's needed to lead Nigeria," she said.
"Many of the so-called Yar'Adua loyalists were in many of the key positions: in particular, the petroleum ministry, the finance ministry - basically the ministries where real money is.
"And Goodluck Jonathan has been under pressure from advisers to dissolve the cabinet in the manner he did ... and to begin to consolidate his position and put people into position whereby they would be not just loyal to him but loyal to the agenda that he's going to set.
|Cabinet dissolution came as unrest continued near the city of Jos in Plateau state [AFP]
"And the period he has is between now and when the next election is going to be held."
Past precedent suggests the process of forming a new cabinet could be drawn out as rival interest groups, especially the governors, jockey for position.
Jonathan, from the southern Niger Delta, is unlikely to run in elections due by April next year because of an unwritten agreement that power rotates between the north and south.
Yar'Adua, who remains bed-ridden, is a Muslim from the north and his predecessor, Olusegun Obasanjo, was a Christian from the south.
Jonathan's presidency has been controversial in Nigeria, with Yar'Adua's northern supporters saying they have been shortchanged since someone from the south has taken over the reins of the country before their leader completed his term.
The country had been plunged into a near constitutional crisis, with protests held in the capital demanding Yar'Adua's resignation while he was away for treatment.
Yar'Adua's supporters had also staged rallies in his support.
Fears of a coup have permeated the country, which has a long history of military dictators, but senior officials in the armed forces promised not to intervene and restricted troop movements.
Charles Dokubo, an analyst at the Nigerian Institute of International Affairs, said that security forces will likely stay away, even with Jonathan asserting more power.
"I think the Nigerian people have been so quiet and have been allowing things to unfold in an evolutionary manner," Dokubo told The Associated Press news agency.
Yar'adua supporters "might make noise about it, but I don't think it will lead to any other upheaval or anarchy in the country".