The kickback scandal surfaced on Sunday when nine audio tapes were leaked to news media.
The tapes appeared to reveal alleged backroom negotiations between government officials, a former congressman and a top oil baron, in an alleged bid-rigging scheme that would have Norway’s Discover Petroleum win five oil exploration concessions.
Del Castillo is one of those named during the conversations caught on the tapes.
He has denied any wrong-doing.
Juan Valdivia, the former mines and energy minister, and two energy officials had earlier been forced to step down over the scandal.
Garcia accepted his cabinet’s resignation, saying: “I told them they should not be ashamed of losing their jobs because of politics.”
The president may end up reappointing some of the ministers to his 17-member cabinet.
Peru’s congress also voted to investigate all oil and gas concessions granted since 2006.
It will also examine for irregularities contracts signed with foreign oil companies.
The scandal coincides with plummeting approval ratings for Garcia, who is mid-way through his second five-year term in office.
Garcia first served as Peru’s president in 1985, leaving the country in economic ruin by the end of that term.
He was elected again in 2006, this time championing free-markets and foreign investment.
According to the opposition, one of the reasons behind Garica’s current popularity slump is his insistence in keeping del Castillo at the government’s helm.