Grace, 52, called Mnangagwa a coup plotter and a coward on Sunday in a speech that inflamed an already bad-tempered rift in the ruling Zanu-PF party.
"Mr Mnangagwa's conduct in discharge of his duties is inconsistent with the responsibilities", Information Minister Simon Moyo said.
"His Excellency the President Of Zimbabwe...has exercised his powers to relieve Hon VP Mnangagwa of his position as VP of the Republic Of Zimbabwe with immediate effect". The reaction of the military could be key. "That man is a ravisher", said Grace. Grace denied the allegations.
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Earlier this morning, Zimbabwe awoke to news that the President, Robert Mugabe had convened a press conference where he sought to sack his deputy.
Mnangagwa was the most prominent of two vice presidents and had been part of Mugabe's cabinet since independence in 1980.
Newsmen report that Mnangagwa was appointed vice-president in 2014, taking over from Joice Muguru, who was axed after Grace launched a campaign accusing her of plotting to topple the president. Mnangagwa's biggest undoing may well have been his vocal supporters, who kept prodding Mugabe to step down.
She insisted that it was time the vice president paid for fanning factionalism in Zanu PF and sacrificing others in his ambitions to succeed President Mugabe. His main rival Morgan Tsvangirai has been in and out of a South African hospital after announcing he had colon cancer in 2016.