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Labour leader David Shearer announced the demotion after he secured a unanimous endorsement from his caucus at an urgent meeting this afternoon.
Mr Shearer said Mr Cunliffe was unable to show loyalty.
"His actions at the weekend were disappointing not only to me but to many party members. That, along with his repeated failure to quell speculation about the leadership, means that I no longer have confidence in him.''
He said there was a "robust discussion'' in caucus and it was possible Mr Cunliffe could return to the front bench if he proved his loyalty.
"I regret having to take the action I have today but he has left me with no alternative.''
The meeting followed the party's annual conference over the weekend at which Mr Cunliffe repeatedly refused to rule out a challenge to Mr Shearer.
Mr Cunliffe later said he would endorse Mr Shearer but would not commit to that when Mr Shearer faces a formal confidence vote in February.
That vote will be held under new party rules which allow 40 per cent of caucus to force a leadership contest by refusing to endorse him.
Mr Cunliffe avoided waiting media when he arrived at Parliament but waved quickly as he entered the caucus room.
Several MPs have been openly angry about Mr Cunliffe's behaviour at the conference, saying he had openly undermined both Mr Shearer and former leader Phil Goff.
However, his allies have argued that no leadership challenge was planned.
Mr Cunliffe's wife Karen answered his phone after the meeting and said he would not be commenting.
"He has said that caucus has resolved that the only person able to speak on this is the leader, so David Cunliffe is not at liberty to comment.'
Mana MP Kris Faafoi said he was pleased Mr Shearer had been fully endorsed by caucus.
"It's time to get on with it, and I think people want us to get on with it -we should get on with it and it's been dealt with."
He said he did not have any advice for Mr Cunliffe.
Fellow MP Sue Moroney would not comment.
Mr Cunliffe posted an online message this evening which read: "Thank you to the hundreds of social media friends who have messaged in friendship and support in recent days.
"I wish I could express my gratitude for your kindness and my wish that we all might work together for a better New Zealand. Unfortunately I am not at liberty to comment further at this time."
- By Claire Trevett