Saudi King Salman issued a royal order on Thursday demanding a cabinet reshuffle, the Saudi Press Agency (SPA) reported.
Mr Assaf was detained briefly in the Crown Prince's anti-corruption crackdown last year but was released within weeks of his detention at Riyadh's Ritz-Carlton hotel last year.
New Foreign Minister Ibrahim al-Assaf is a former long-serving finance minister and a board member of Saudi oil giant Aramco.
Ibrahim al-Assaf will replace Adel al-Jubeir, the foreign ministry said on Thursday citing the decree.
Russian Federation warned the USA against any effort to influence the royal succession in Saudi Arabia, offering its support to embattled Saudi Crown Prince Mohammed bin Salman, who's under continuing pressure over the killing of a government critic.
The murder of journalist Jamal Khashoggi in the Saudi consulate in Istanbul has shone a spotlight on the ultra-conservative Islamic nation.
The death sparked outrage internationally and jeopardised Riyadh's relations with its western allies.
Various reports have verified that some members of a 15-member hit team, which traveled to Istanbul to carry out the killing, had been drawn from among bin Salman's personal bodyguards.
Al-Jubeir was an adamant champion of the Saudi campaign in Yemen as he repeatedly defended Riyadh's actions as well as the blockade of the country ravaged by conflict and plagued by starvation and cholera epidemic.More news: Magnitude 4.8 natural disaster in Italy causes damages, injuries
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His articles in the Washington Post had been particularly critical of Crown Prince Mohammed bin Salman, the country's de facto leader.
"But I now think he's been used as another scapegoat in this issue".
Jubeir was effectively demoted to minister of state for foreign affairs, the decree added without explaining the change, as the kingdom appears diplomatically weakened after Khashoggi's murder.
King Salman also appointed Prince Abdullah bin Bandar bin Abdulaziz to replace Prince Khaled bin Ayyaf as chief of the National Guard.
General Kalid bin Qirar al Harbi was named general security chief, while Musaed a Aiban was appointed national security adviser.
Al-Sheikh, who is known to be close to the crown prince, was replaced as head of the Sports Authority by Prince Abdulaziz bin Turki al-Faisal.
Turki al-Sheikh has been moved to a new portfolio heading up the entertainment authority. Rotana is owned by billionaire investor Prince Alwaleed bin Talal, who was also detained at the Ritz a year ago and later released.
The king also ordered the creation of a national space agency to be led by one of his other sons, Prince Sultan bin Salman, a former astronaut.