Jeremy Corbyn sacked Hilary Benn after the shadow foreign secretary raised concerns about his leadership.
Leeds Central MP Benn said there was "widespread" worry among Labour MPs and in the shadow cabinet over Corbyn's ability to win a snap election in the wake of David Cameron's resignation.
At a "critical" time for the country, the Labour Party required strong and effective leadership, Benn said.
"It has now become clear that there is widespread concern among Labour MPs and in the shadow cabinet about Jeremy Corbyn's leadership of our party," he said in a statement.
"In particular, there is no confidence in our ability to win the next election, which may come much sooner than expected, if Jeremy continues as leader.
"At this critical time for our country, following the result of the EU referendum, we need strong and effective leadership of the Labour Party that is capable of winning public support so that we can stand up for the people of Britain.
"In a phone call to Jeremy, I told him that for these reasons I had lost confidence in his ability to lead the party and he then dismissed me from the shadow cabinet."
A Labour spokesman told the Press Association that Corbyn sacked the shadow foreign secretary "on the grounds that he has lost confidence in him".
The sacking follows claims in the Observer that Benn called fellow MPs over the weekend to take soundings about a revolt.
The party leader has faced accusations from his own MPs that he led a weak campaign in the EU referendum and is facing a motion of no confidence.
Benn was reportedly planning to ask Corbyn to stand down and had asked other senior frontbenchers to quit with him if the leader refused to budge.
But Corbyn has made it clear he will fight any move against him by MPs and would rely on the backing of grass-root party members if it comes to a leadership challenge.
Some Labour MPs were quick to criticise Corbyn over his decision to sack Benn.
Shadow housing minister Roberta Blackman-Woods said: "This is sad news indeed and I cannot understand how Jeremy thinks it will help his worsening position with the PLP."
Labour MP Wes Streeting said: "Lots of good people chose to serve in shadow cabinet to keep the show on the road. There are no longer good reasons for good people to stay."
Labour's leadership turmoil comes as the Conservatives are consumed by their own post-referendum leadership frenzy in the wake of David Cameron's resignation speech on Friday.