"This decision [to dismiss the government] is not linked to my assessment of the work of this government, which I believe has been satisfactory on the whole,” Putin said. “It is dictated by my wish to once again set out my position on what course Russia will take after 14 March [Russia's presidential election]," Putin said.
Putin is widely expected to win re-election in March.
"As Putin said to his campaign representatives, he is hoping to appoint a successor."
The dismissal removes Prime Minister Mikhail Kasyanov, the last major holdover from Boris Yeltsin's government.
Putin has appointed Deputy Prime Minister Viktor Khristenko as acting prime minister. The president has also asked the remaining government ministers to stay in play until a new cabinet is appointed.
Under the Russian Constitution, a new candidate for prime minister must be submitted to parliament within two weeks.
Putin defended his decision to dismiss the government now, rather than waiting until after the elections.
"I believe that Russian citizens have the right to know and should know the proposals on the makeup of the country's highest executive body in case of my re-election as Russian president. It is the government that has the most significant role in pushing forward all public, social, and economic reforms in the country, therefore I think it is right to define the makeup of the highest executive body of state power, which will have to assume its own part of responsibility for the further development of our country, now, without waiting for the end of the election campaign," Putin said.
Speculation has simmered for months that Kasyanov was on his way out.
Kasyanov had been a vocal critic of the government's probe of the Yukos oil giant and the jailing of its head, Mikhail Khodorkovskii. The prime minister said the case would have a negative impact on the country's economic recovery.
The Yukos probe is widely believed to have been Kremlin-driven and Kasyanov's criticisms likely irritated Putin and his aides.
Kasyanov was also a close ally of former chief of staff Aleksander Voloshin, who resigned in December 2003 following Khodorkovskii's arrest.
Andrei Piontkovskii, a Russian political analyst, says that Kasyanov's dismissal was not a surprise -- but the timing of it was.
"Everyone understood that Kasyanov would be sacked,” Piontkovskii said. “Lately, his attitude toward Putin has been very independent and I would even say daring, especially in regards to Khodorkovskii's case. But dismissal several days before the election points to some crisis at the top. I think it has some connection to the campaign, which has been turning into a farce. I believe that Kasyanov's dismissal will be used by Putin at the end of the campaign to give a sharp boost to his image as a fighter against the oligarchy."
Kasyanov served in the Soviet-era state planning agency Gosplan during the 1980s and after the Soviet collapse in 1991 began a steady rise through economic and financial posts.
As deputy finance minister in 1996 he worked out a deal for repaying debts that Russia inherited from the Soviet Union and two years later was a key figure in Russia's efforts to retain stability and credibility after Russia defaulted on foreign debt payments and the ruble's value plunged.
He became finance minister under Yeltsin in 1999 and one of his main achievements in that post was persuading the Paris Club of creditors to reschedule about $8 billion in Soviet-era loans.
After Vladimir Putin became acting president upon Yeltsin's resignation on 31 December 1999, he appointed Kasyanov first deputy prime minister, effectively making him Russia's No. 2 official.
After Putin was elected president in the spring of 2000, he appointed Kasyanov prime minister.
Khristenko, the new acting prime minister, is considered a reformer with a background in practical economics in the provinces.
A former economics lecturer, he served as an emissary to the International Monetary Fund and as deputy prime minister under Yeltsin before crossing over to the Putin administration, like Kasyanov.
Khristenko is not expected to hold the post. Piontkovskii says he expects Putin to name a new prime minister within days.
"After the 2004 elections, for the next four years and maybe beyond that, we will have only one politician in the country. Well, maybe one and a half. As Putin said to his campaign representatives, he is hoping to appoint a successor. And the name of that half we will probably learn in the next couple of days," Piontkovskii said.
Putin's announcement today sent shares tumbling on the Russian stock market, with dips of 3 to 5 percent within minutes of Putin's statement, the Interfax news agency reported.
The European Union declined immediate comment on the issue. A senior official at the European Commission, who asked not to be identified, told RFE/RL that the move was an "internal matter."