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The decision is bound to anger supporters of Yingluck, but the court did allow ministers not implicated in the case against her to stay in office, a decision that could take some of the sting out of any backlash on the streets.
After the ruling, the cabinet said Commerce Minister Niwatthamrong Boonsongphaisan, who is also a deputy prime minister, would replace Yingluck, and the caretaker government would press ahead with plans for a July 20 election.
"The caretaker government's responsibility now is to organise an election as soon as possible," said Niwatthamrong, a former executive in a company owned by Thaksin Shinawatra, Yingluck's brother and himself a former prime minister who was ousted by the military in 2006.
"I hope the political situation will not heat up after this," Niwatthamrong said of the court ruling.
Thailand's protracted political crisis broadly pits Bangkok's middle class and royalist establishment against the mainly poor, rural supporters of Yingluck and Thaksin, who lives in exile to avoid a 2008 jail sentence for abuse of power.
Yingluck, who faced six months of sometimes deadly protests in the capital, Bangkok, aimed at toppling her government and ending the considerable political influence of her brother, thanked the Thai people in a televised news conference.
"Throughout my time as prime minister I have given my all to my work for the benefit of my countrymen ... I have never committed any unlawful acts as I have been accused of doing," Yingluck said, smiling and outwardly upbeat.
"From now on, no matter what situation I am in, I will walk on the path of democracy. I am sad that I will not be able to serve you after this."
Despite her removal from power, there is no obvious end in sight to the turmoil in Thailand, with protesters opposed to Yingluck and her government still pushing for political reforms before new elections.
The United States, a close ally of Thailand, urged a peaceful and democratic solution to the crisis, saying this "should include elections and an elected government."
"We urge all sides at this time to exercise restraint and reaffirm that violence is not an acceptable means of resolving political differences," State Department spokeswoman Jen Psaki told a regular news briefing in Washington.
The judge who delivered the verdict at the Constitutional Court said Yingluck had abused her position by transferring a security chief to another post in 2011 so that a relative could benefit from subsequent job moves.
The court ruled that nine ministers linked to the case should step down, but others could remain, leaving Yingluck's ruling party in charge of a caretaker government.
Yingluck, a businesswoman until entering politics to lead her party to victory in a 2011 election, was not in court on Wednesday. Thaksin, based in Dubai, was unavailable for comment.
Financial markets took the ruling in their stride. The stock market had fallen as much as 1.1 percent in early trade as investors worried about unrest if Yingluck's whole cabinet had been forced out, but the index ended down just 0.1 percent. The baht currency was barely changed at 32.37 per dollar.
PROTESTS WILL GO ON
Yingluck's supporters accuse the Constitutional Court of bias in ruling against governments loyal to Thaksin. In 2008, the court forced two prime ministers linked to Thaksin from office.
"We were bracing ourselves for this verdict. Everything our enemies do is to cripple the democratic process," said Jatuporn Prompan, the leader of pro-Shinawatra "red shirt" activists. "The court chose a middle way today."
Asked about a vow to resist Yingluck's removal that had raised fears of violence, Jatuporn replied: "There is no reason why we should take up arms. We will rally peacefully as planned on May 10."
In Thailand, the prime minister is normally elected by the lower house of parliament, but that was dissolved in December when Yingluck called a snap election to try to defuse protests.
From that point, she headed a caretaker administration with limited powers. The election in February was disrupted and later declared void by the Constitutional Court.
Yingluck and the Election Commission agreed last week a new ballot should be held on July 20, but the date has not been formally approved and it is bound to be opposed by protesters.
Thaksin or his loyalists have won every election since 2001 and would probably win again.
The former telecoms tycoon won huge support in rural areas and among the urban poor with populist policies such as cheap healthcare and loans. But his enemies say he is a corrupt crony capitalist who buys elections and harbours republican sympathies, which he denies.
The anti-government protesters say they want to end Thaksin's hold over politics and are demanding reform of the electoral system before new polls.
The main leader of the protests, Suthep Thaugsuban, later told supporters to prepare for a big rally on Friday. "We can no longer let this illegitimate party rule this country," he said.
Ongoing turmoil would make matters worse for Southeast Asia's second-largest economy, already suffering from weak exports, a year-long slump in industrial output, a drop in tourism and a caretaker government with curtailed powers.
The army, which has staged numerous coups since the end of absolute monarchy in 1932, has stayed out of the turmoil, as has King Bhumibol Adulyadej. The king, who is 86, has intervened to defuse previous crises, but has not commented since this one blew up late last year.
The divide between the poor and what they see as the establishment elite represents a collapse of a traditional order in Thailand at a time when people have begun to broach the hitherto taboo topic of royal succession.
Crown Prince Vajiralongkorn does not command the same devotion as his father, the world's longest-reigning monarch.