He will now go into open opposition to the Kremlin, after four months in which he made a calculated effort to remain a political outsider, despite his glittering array of titles - Secretary of the Security Council, presidential envoy to Chechnya, and national security adviser.
In one of the strangest twists in his political odyssey, he will do so in alliance with General Alexander Korzhakov, the former hawkish chief bodyguard and confidant of Boris Yeltsin, who boasts possession of some of the Kremlin's innermost secrets, and has long been seen as one of the shadowiest figures in Russian politics.
The sacking, announced by a remarkably healthy looking Mr Yeltsin on national television last night, involves a considerable political risk on the President's part.
Mr Lebed was almost single-handedly responsible for striking Russia's side of the fragile peace deal which ended the Chechen conflict - an accord that earned him the hatred of some top generals, but the gratitude of the army's rank-and-file and a war-weary population.
Last night, the Chechen separatists made clear that his departure now throws the future of the agreement into doubt, raising the spectre of more bloodshed, although it was already showing signs of fracturing. Mr Lebed himself predicted the "worst possible scenario" in the troubled republic, where he claims up to 100,000 people have died since the conflict began in December 1994.
The Chechen peace deal made the already popular Mr Lebed into the favourite for the presidency and - according to the pollsters - the most trusted man in Russia. By kicking him out before he has had a chance to become politically sullied by his association with an increasingly unpopular government, Mr Yeltsin has created a formidable opponent for the Kremlin's anointed candidate at the next election. He may also have made a martyr.
His departure is a stunning example of how political fortunes and alliances are made and broken in the cauldron of Russian politics as vying groups grapple for power in a country where the roots of democracy are still shallow.
It was Mr Yeltsin's closest advisers who turned the amateurish Mr Lebed from a no-hoper into a serious candidate during the last election, covertly funding his presidential campaign in the knowledge that this would take votes away from the Communists, the main challengers.
After Mr Lebed came third in the first round, with almost 11million votes, Mr Yeltsin somewhat cynically moved to win over his support by sweeping him into the heart of his administration.
Upheavals began from the moment the former paratrooper's boots fell on the plush carpets of the Kremlin. The Defence Minister, General Pavel Grachev - blamed by many for rampant military corruption and the disastrous Chechen war - was dismissed, and replaced by General Igor Rodionov, then a Lebed ally.
Other members of the so-called "Party of War" - General Korzhakov, and the chief of the Federal Security Services, General Mikhail Barsukov - were ousted shortly afterwards. Although their demise was seen as the work of the President's powerful chief-of-staff, Anatoly Chubais, Mr Lebed played a part.
What followed was an increasingly blatant presidential campaign waged by Mr Lebed as Mr Yeltsin remained in seclusion. A publicity-addicted Mr Lebed also quickly established a reputation for wild remarks - for instance, calling Mormons "scum" and suggesting that Nato expansion should be met with Russia's "rusty missiles". Although these outbursts appear to have been an attempt at populism, they frequently caused official discomfort, not least because they conflicted with the Kremlin line.
A politician who has never held on to friends for long, Mr Lebed also started locking horns with the top men in the administration - from Mr Chubais, to Viktor Chernomyrdin. But his sworn enemy was Anatoly Kulikov, the Interior Minister whose public attack on him precipitated yesterday's events.
To widespread astonishment, General Kulikov accused him of planning to seize power by force, aided by Chechen fighters and, it seems, by a 50,000 force that he hoped to build along the lines of the French Foreign Legion, which could be used to "liquidate" political leaders who threatened the country's security. Mr Lebed dismissed the claims and announced plans to sue.
The slanging match was not entirely surprising The two men have been at each other's throats over Chechnya since Mr Lebed called for General Kulikov's sacking in August, accusing him of mishandling the war, not least by allowing rebel forces to seize Grozny.
General Kulikov retaliated by accusing his rival - one of the very few Russians whom the Chechens trust - of striking a deal with the rebels which amounted to treason, because the separatists appeared to expect to become a sovereign nation.
But the general's attack was also part of a larger game: a Kremlin move to oust Mr Lebed from power altogether, preferably coated with plenty of mud. Senior members of the Yeltsin administration - notably, Mr Chubais, and the Prime Minister, Viktor Chernomyrdin - have been growing increasingly concerned by his rising stature.
They have no reason to believe he is a deal-maker who, as president, would accommodate their interests, or those of the financial and energy empires that support them. They have a limited amount in common with his erratic brand of Russian nationalism, with its doubtful commitment to free-market economics. Nor do their wealthy political allies, who have enriched themselves in the rush towards privatisation, much relish his commitment to root out corruption.
Moreover, Mr Lebed never attempted to hide his ambition to turn the Security Council into a powerful organ, with oversight of all the more than 3.7 million armed entities within the "power" institutions - defence, the security services, and the Interior Ministry.
He was appointing his own men - outsiders - to the council, and assiduously building political support within the army, signing up recruits to his fledgling political organisation "Truth and Order". He had forged a link with General Korzhakov, an ex-KGB man who boasts a stock of kompromat - compromising material - and who offered the possibility of rallying the security services under Mr Lebed's banner.
In short, he represented a threat. Yesterday the President's men will have been rubbing their hands in glee to see the Mr Lebed disappearing into the distance after Mr Yeltsin signed his dismissal decree on television. But they must have known that Mr Lebed, a boxing enthusiast, will regard his exit only as the end of round one. There are plenty more rounds to go.Reuse content