MOSCOW: Russian President Vladimir Putin Tuesday fired defence minister Anatoly Serdyukov over a corruption scandal, the most dramatic change to the government since he returned to the Kremlin for a third term.

Putin replaced Serdyukov, who had been implementing an unpopular but Kremlin-backed military reform, with Moscow region governor and long-standing ally Sergei Shoigu, his spokesman said.

Serdykov was relieved of his duties so that a thorough investigation can proceed into a suspected $100 million property scam at a defence ministry holding company, Putin's spokesman Dmitry Peskov told AFP.

“This is in connection with the situation at the defence ministry. It has been done to create all the necessary conditions for the investigation,” Peskov said.

The sacking comes at a sensitive time, with relations with Washington tense as the United States elects a new president and Putin facing an unprecedented challenge at home from popular demonstrations.

Russian investigators on October 25 searched the offices of a defence ministry holding company, in a highly unusual move after opening a criminal probe into a suspected $100 million property scam.

Serdyukov, one of the country's three people with access to nuclear launch codes, at the time was summoned for a meeting with Putin which raised immediate questions about his future.

A former furniture salesman who rose to head the Russian tax authority, Serdyukov became the first civilian to serve as post-Soviet Russia's defence minister when he was appointed in 2007.

His lack of military credentials and controversial military reform programme made powerful enemies within the defence ministry as he tried to push through the army overhaul.

Shoigu is seen as one of Putin's closest friends and allies, serving as emergency situations minister from 1994-2012. He was only appointed to the key job of Moscow region governor this year.