The President's decision came as Russia was grappling with one its most precarious fiscal crises since the break-up of the Soviet Union in 1991.
A statement from the Kremlin said that Viktor Chernomyrdin would be appointed as acting Prime Minister - a post he held for more than five years before being abruptly dismissed in March.
The Kremlin's unexpected announcement came less than a week after the international financial community was rocked by Russia's decision, in effect, to devalue the rouble and default on some foreign debts, marking the failure of a long and costly battle to prop up the currency.
It is the second time Mr Yeltsin has sacked his government in a year; he gave no reason. Mr Kiriyenko's sudden departure came as he was in the midst of a weekend of painful bargaining with foreign and Russian investors over how to restructure $40bn of government debt on high interest treasury bills, some of which Moscow is expected to be forced to write off as it cannot afford to service it.
The discussions also concerned billions of dollars owed by Russian banks to Western institutions, currently under a 90-day moratorium. The fate of the negotiations - upon which the future of the whole banking system could rest - was unclear last night, but it seemed likely that they were in havoc.
When Mr Kiriyenko, 35, was ushered onto the world stage with his surprise nomination as Prime Minister in March, he was greeted with cries of amazement from opposition politicians who argued that he was far too inexperienced for the job.
But Mr Kiriyenko had begun to establish a reputation among Mr Yeltsin's Western supporters for calm efficiency, even though the country's economic problems - deepened falling oil process and turmoil in Asia - seemed to worsen by the day. The share market plunged downwards, tax collection remained dismal, and the rouble began to topple despite the $23bn bailout supervised by the International Monetary Fund.
The return of Mr Chernomyrdin, 60, the wealthy former chief executive of the Gazprom gas monopoly, will win little public applause and is thus a gamble on Mr Yeltsin's part.
Mr Chernomyrdin will be seen by many as yet another blunder by an increasingly incomprehensible President. His critics say he is indecisive. Worse, he is associated with an unpopular administration that presided over a period of corruption, rising crime and the Chechen war and a privatisation process that did little more than place private monopolies in a hands of a rich few. Despite his aspirations to become president in 2000, Mr Chernomyrdin is often seen an energy fat cat, whose complacency is often the butt of Russian jokes.
Mr Yeltsin can expect a battle with the Communist-dominated Duma (parliament)over his latest appointment.
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