President Mohamed Mursi also cancelled a constitutional declaration that limited presidential powers and which the ruling army council issued in June, as voting in the election that brought Mursi to power drew to a close.
There had previously been much debate over the fate of 76-year-old Tantawi, who had ruled Egypt as head of the military council after Mubarak was toppled last year, but the timing of the announcement to replace him was a surprise.
The move sidelines Tantawi, whose presence had cast a shadow over Mursi's rule, and appeared to whittle away at the remaining powers of the military, from whose ranks every president for 60 years had been drawn until Mursi's election.
"Field Marshal Hussein Tantawi has been transferred into retirement from today," presidential spokesman Yasser Ali said in a statement, appointing in his place as armed forces chief and defence minister General Abdel Fattah al-Sisi.
Mursi also ordered Chief of Staff Sami Enan to retire and appointed General Sidki Sobhi in his place. Both Tantawi and Enan were appointed advisers to Mursi.
"The decision was sovereign by the president to pump new blood into the military establishment for the sake of developing the new, modern state," spokesman Ali told Reuters after making the announcement.
Army General Mohamed el-Assar, who was appointed deputy defence minister in the changes, said the decision had been taken in consultation with Tantawi and the rest of the military council.
In further changes, Mursi appointed a judge, Mahmoud Mekky, as his vice president. Mekky is the brother of the newly appointed justice minister, Ahmed Mekky, who had been a vocal critic vote rigging under Mubarak.
"This clash between the new president and the military council was expected but not this fast," said analyst Gamal Soltan.
