"The misuse of Irish passports by a state with which Ireland enjoys friendly, if sometimes frank, bilateral relations is clearly unacceptable and requires a firm response," he said.
Ireland is following in the footsteps of Britain and Australia, which each expelled Israeli diplomats after concluding Israel had probably forged passports from their country as part of an operation by Mossad, the Israeli foreign intelligence unit.
Dublin had not been able to link Israel conclusively to the forgery.
"I want to state clearly that the official concerned is not accused or suspected of any particular wrongdoing," Martin said.
"In being obliged to leave their post prematurely, the official concerned is a victim of the actions of the state they represent."
But "the fact that the forged Irish passports were used by members of the same group who carried the forged British and Australian passports, leads us to the inescapable conclusion that an Israeli government agency was responsible for the misuse and, most likely, the manufacture of the forged Irish passports associated with the murder of Mabhouh," Martin said.
Israel's foreign ministry said it "regrets the decision of the Irish government, which is not in line with the importance of our relationship".
It maintains there is no proof linking Israel to the doctored passports or the killing of Mabhouh.
Dubai has accused Israel of being behind the killing of the Hamas commander and has provided the names of over two dozen alleged members of a team it says tracked and killed the Palestinian, using fraudulent British, Irish, French, German and Australian passports.
Tayeb Ali, a British human rights lawyer from Irvine Thanvi Natas solicitors, has been appointed by the family of Mabhouh to pursue legal action over the matter in Britain.
|Mabhouh was found dead in his hotel room in Dubai in January [EPA]
Mabhouh's family welcomed the recent arrest in Poland of a suspected Mossad agentwanted by Germany over the assassination.
Germany is now seeking the extradition of the man.
Mabhouh, a founder of the military wing of the Palestinian group Hamas, was found dead in his hotel room near Dubai airport on January 20.
Dubai police believe he was killed the night before and say they are "99 per cent sure, if not 100 per cent" that Mossad was behind his killing.
Israel has neither confirmed nor denied any role in the assassination, prompting international indignation.