"I don't understand that. Where does that lead, to insult the Egyptians? To make them want to drop the whole thing? What do we stand to gain from that?" he said during an interview for the Israeli newspaper Maariv.
The move comes as Hillary Clinton, the US secretary of state, is to travel to Israel and the West Bank next week for meetings with Israeli and Palestinian leaders following the conference in Cairo on reconstruction in Gaza on March 2, officials in the region said on Monday.
Egypt ties at risk
Gilad said that the Israeli government's new negotiating stance risked alienating Egypt - the first Arab country to sign a peace treaty with Israel in the late 1970s.
"We have already insulted them [the Egyptians]. It's madness. It's simply madness. Egypt has remained almost our last ally here," he said.
Olmert's office said he no longer had confidence in Gilad and that the government would continue with the Cairo talks through a different envoy.
"It was totally unprofessional and unseemly for a civil servant to publicly attack his boss"
Israeli government official
"The straw that broke the camel's back was the public interview last week for Maariv
," one government official told the Reuters news agency.
"It was totally unprofessional and unseemly for a civil servant to publicly attack his boss."
The defence ministry has yet to officially comment on Gilad's replacement, but the incident has served to highlight tensions betweeen Olmert and Barak in the run-up to difficult coalition negotiations.
Gilad's removal has angered Hamas, the Palestinian faction that controls the Gaza Strip. It accused Israel of acting in bad faith and urged Egypt to open its border crossing with the Strip.
"This shows that the Zionist occupation government has no intention of reaching an agreement on the calm or of concluding a prisoner swap," Fawzi Barhoum, a Hamas spokesman, said.
Meanwhile, a European Union delegation led by Hans-Gert Pottering, speaker of the European parliament, arrived in Gaza on Monday after travelling through the Rafah border crossing between Egypt and the territory.
The Egyptian authorities opened the Rafah crossing on Sunday for a period of three days.