The move ends a 15-month battle between London and their outspoken envoy to Tashkent, who has embarrassed his masters by speaking out on Uzbekistan's poor human rights record.
Mr Murray expressed "bitter disappointment" last night at the decision and said he would sue the Foreign Office for damage to his health.
"What I have been told about why I have to leave Tashkent is that the publicity surrounding my position would make my return impossible," he told the Guardian. "I have not been told as to why in any great detail."
He said it was clear from his conversation with his employers that the Uzbek government had been informed of the FO's decision before he was. "My immediate reaction was bitter disappointment. I intend to sue them for the damage to my health".
Mr Murray has alleged that the UK and US remained silent over Uzbekistan's human rights record, where torture is practised as a routine investigation technique, because US forces were using an airbase vital for launching Operation Enduring Freedom in neighbouring Afghanistan.
"Craig has been withdrawn as an ambassador," said an FO spokesman last night. "This was a decision taken by senior FO management." He said ministers had been informed but were not involved in the move, which was "taken by the administration" and based "purely on personnel matters".
The spokesman added: "It was felt that it was not possible for him to carry out his full range of duties and there was not the confidence and cooperation [that there should be] between ministers, colleagues and Craig."
He said Mr Murray would move on to other FO duties.
Mr Murray's criticism of Uzbekistan has embarrassed London and Washington. In July the US was forced to withdraw part of its multimillion dollar aid package to the country partly because of the abuses the ambassador highlighted.
Uzbek president Islam Karimov was angered when the UN secretary general, Kofi Annan, a friend of Mr Murray's, brought up a speech the envoy made on human rights abuses during one of their official meetings.
Mr Murray faced 18 disciplinary charges in July last year. The investigation into the charges - ranging from being drunk at work to issuing visas to local women for sex - were dismissed as unfounded. Mr Murray claims the charges caused him to have a nervous breakdown.
The sacking comes after a week in which Mr Murray's security clearance was withdrawn, and in which his criticism of the FO's use of information obtained by Uzbekistan under torture was leaked to the media in confidential documents.
Throughout the dispute, the FO has maintained that the ambassador is representing the UK's official policy on Uzbekistan. Last night's comments were their first public rebuke of his conduct.
Mr Murray, 45, married with two children, was one of Britain's youngest ambassadors when he arrived in Tashkent in August 2002. In September 2003 he had a nervous breakdown.
Once FO doctors had said he was healthy to return to Tashkent, he boarded a plane to Uzbekistan on which he developed a near-fatal pulmonary embolism. His wife has subsequently left him.
