Patrick Graichen, deputy minister under Habeck, first came under fire when it emerged that he had facilitated the recruitment of a friend, who was best man at his wedding, as head of the state-owned German Energy Agency (Dena).
"The moment it became clear that my best man and long-time friend Michael Schafer was applying for the position, I should have withdrawn from the selection committee," Graichen told Bundestag lawmakers last week.
What Robert Habeck said about the Graichen affair
Habeck previously said the recruitment decision was above board, but an internal investigation found Graichen also violated ministry compliance regulations when he signed off on government funding for a national climate protection project in which his sister was involved.
"People make mistakes ... it was one mistake too many," Habeck said on Wednesday.
"This is a far-reaching, difficult decision, far-reaching for my ministry, difficult for me and very difficult for Patrick Graichen. But it is about protecting trust in the work of this ministry as an institution. It's about maintaining the ability to act politically," he added.
Graichen wrote on Twitter the "challenges we face are too great to continue to be overshadowed by debates about myself and my family," and therefore he and Habeck decided it was better for him to leave.
Opposition threatens inquiry into Graichen
Both Habeck and Graichen are from the environmentalist Green party, partners in the governing coalition with Chancellor Olaf Scholz's center-left Social Democratic Party and the neoliberal Free Democratic Party.
Opposition lawmakers from the CDU-CSU had repeatedly asked for Graichen's dismissal and threatened to call for a parliamentary inquiry into the suspicions of nepotism.
Scholz said he had "taken note" of Habeck's decision.
He said he personally had worked well with Graichen, and "I assume that the economy minister will now continue his work at full power."
While you're here: Every Tuesday, DW editors round up what is happening in German politics and society. You can sign up here for the weekly email newsletter Berlin Briefing.
lo/rt (Reuters, dpa, AP, AFP)