The pope asked Grand Master Matthew Festing, 67, to step down at a meeting on Tuesday, a spokesperson for the Rome-based Catholic institution said. Grand masters usually rule for life. Festing's resignation was the first in recent history.
The Vatican, which is a sovereign state, said on Wednesday that the pope would name a "pontifical delegate" to run the group, which itself has sovereign status and is recognized by about 100 countries.
Vatican sources said it would be temporary until the situation had cooled down and the Knights were in a position to elect their own leader again.
The move was similar to one in 1983 when the Pope John Paul II named a delegate to temporarily run the Jesuit order, which he feared was becoming too leftist. More recently, the Vatican named a delegate to run the conservative Legionaries of Christ, which has hit by a sexual abuse scandal.
Festing and the Vatican had been locked in dispute since one of the order's top knights, Grand Chancellor Albrecht Freiherr von Boeselager, was sacked in December in the chivalric equivalent of a boardroom showdown - ostensibly because he allowed the use of condoms in a medical project for the poor.
Von Boeselager appealed to the pope, who appointed a five-member commission to look into the sacking, but Festing refused to cooperate, saying it violated the order's sovereign affairs.
But some insiders said the push against von Boeselager was an excuse by Festing and arch-conservative American Cardinal Raymond Leo Burke, the order's patron, to increase their power.
BATTLE OF WILLS
The battle of wills, which lasted two months, reflected broader conflicts inside the Roman Catholic Church, with Francis facing concerted opposition to his efforts to modernize the Holy See and gently unravel the legacy of his conservative predecessors.
The all-male top leaders of the Knights of Malta are not clerics, but they take vows of poverty, chastity and obedience to the pope. The institution has 13,500 members, 25,000 employees and 80,000 volunteers worldwide.
The order, formed in the 11th century to provide protection and medical care for pilgrims to the Holy Land, has the status of a sovereign entity. It maintains diplomatic relations with over 100 states and the European Union and permanent observer status at the United Nations.
When Festing fired von Boeselager, he accused the German of hiding the fact that he allowed the use of condoms when he ran Malteser International, the order's humanitarian aid agency.
Von Boeselager and his supporters say the condom issue was an excuse by Festing and Cardinal Burke, who has accused the pope of being too liberal, to increase their power.
The church does not allow the use of condoms as a means of birth control and says abstinence and monogamy in heterosexual marriage is the best way to stop the spread of AIDS.
Von Boeselager said he closed two projects in the developing world when he discovered condoms were being distributed but kept a third running for a while because closing it would have abruptly ended all basic medical services to poor people.
Francis has said he wants the 1.2 billion-member church to avoid so-called "culture wars" over moral teachings and show mercy to those who cannot live by all its rules, especially the poor.
Reuters
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