Yunus was relieved of his duties Wednesday through a Bangladesh Bank letter. The letter was sent to bank chairman Khondoker Muzammel Huq, the Daily Star reported.
The letter said Yunus failed to seek the central bank's approval when he was reappointed as the managing director of the Grameen Bank in 2000, violating one of the statutes of the 25 percent state-owned bank.
Grameen Bank has disputed the removal, saying his position was legal.
"This is a legal issue. Grameen Bank is taking legal advice... It has also complied with the law in respect of appointment of the managing director. According to the bank's legal advisors, the founder of Grameen Bank, Nobel Laureate Professor Muhammad Yunus, is accordingly continuing in his office," the bank said in a statement Wednesday.
The international community is also backing Yunus.
Former Irish president Mary Robinson who launched a platform, Friends of Grameen, said there has been a campaign of politically orchestrated attacks on the Nobel laureate.
"Professor Yunus and Grameen Bank paved the way more than 30 years ago for a sustainable model, with very transparent and reasonable interest rates, and making borrowers the owners of their bank," Robinson said.
Over 50 charities and public figures, including former World Bank president James Wolfensohn, former chief justice of India J.S. Verma and American actress Yeardley Smith have joined hands to form the voluntary body.
Robinson, also a former UN high commissioner for human rights, chairs the honorary committee while Maria Nowak, president of French microfinance institution ADIE, heads the executive committee.
Many people have also criticised Yunus because of the high interest the Grameen Bank charges on loans it gives out.
"Many were trapped in a cycle after taking micro-credit support from the bank," Mohammad Ali, the headmaster of a Dhaka school, was quoted as saying by the New Age.
Aminul Islam Sujon, who works with a non-profit organisation Work for Better Bangladesh, said: "It is a legal question. The removal decision should have been made earlier. Law should be equal for everyone."
Others said since Yunus had "brought fame" to Bangladesh through the Grameen Bank and the Nobel Prize, he should have been dealt with leniently.
Yunus also received other known prestigious recognitions, including the US Presidential Medal of Freedom, the King Abdul Aziz Medal and the Ramon Magsaysay Award.
He was also given the rare honour of delivering a lecture at the joint meeting of the members of Lok Sabha and Rajya Sabha in the Indian parliament in 2009.
Tofael Khan, a businessman, said: "Questions have been raised about his micro-credit programme. As he earned fame for the country, I think everything should be done in a manner that is graceful for Yunus."
Shaheen Bin Hai, a physician, said that the way he was removed could not be supported.
"If the government had initiated any steps against his micro-credit activities, I would have supported the government. But now it seems it is a political decision. When the government thought he was useless, it sacked him," he said.
Grameen Bank now has 20,000 employees and 83.5 lakh customers. It has distributed 60,400 crore taka ($8,440 million) in loans as of January 2011. Its social business partnerships with global brands such as Adidas and Danone have secured employment for over 30,000 people.
Prime Minister Sheikh Hasina had earlier said micro-financiers "suck blood out of the poor in the name of eradicating poverty"."We cannot allow use of the poor people as guinea pigs," she said.