Commander Eric Rasch "was relieved due to a loss of confidence in his ability to command," the Navy said in a statement yesterday, adding he has been temporarily reassigned to a new role.
The dismissal is the first time a sailor has been held publicly accountable after two US riverine patrol boats veered off course into Iranian territorial waters off Farsi Island in the Gulf.
Navy spokesman Lieutenant Commander Tim Hawkins said other sailors have also been held accountable, but he would not say who these were because the incident remains under investigation.
"Administrative action can range from verbal counselling to a formal letter of reprimand."
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The Navy probe is expected to be wrapped up by the end of the month and will be released publicly soon after.
Though the sailors were held for less than 24 hours, the incident was a major embarrassment for the US Navy and President Barack Obama.
The United States carefully avoided escalating the situation, maintaining a conciliatory tone with Tehran days ahead of the implementation of a historic international deal over Iran's nuclear program.
The US military says the incident was caused by navigational and mechanical problems.