The resignation of Grand Master Matthew Festing followed a month-long stand-off that had become a test of the reforming pope's authority over rebellious Church conservatives.
"The Grand Master was received on Tuesday by Pope Francis who requested his resignation, which the Grand Master agreed to," a spokesman for the Order told AFP.
Confirming Festing's departure, the Vatican said Francis had "expressed his appreciation and recognition for (Festing's) loyalty and devotion to the successor to St Peter (the pope) and his readiness to humbly act in the interests of the Order and the Church."
In theory, Briton Festing was in the job for life. His resignation has to be approved by the Order's sovereign council, which has been convened for Saturday.
The unprecedented and very public dispute between the Vatican and the Knights was seen by Holy See watchers as a proxy war between Church liberals and conservatives, led by American cardinal Raymond Burke.
The row erupted last month when Francis appointed a five-strong team to examine the circumstances in which the Order's number three was forced out of his job.
The Knights, a Church-linked charity body descended from the crusaders of the Middle Ages, refused to cooperate.They said the December dismissal of Grand Chancellor Albrecht von Boeselager was an internal affair.
Festing subsequently claimed in a leaked letter that three of the Vatican's appointees had a conflict of interest because of links to a Geneva-based fund in which the Order also had a stake.
That blatant defiance of papal authority appears to have been the last straw.
Von Boeselager's dismissal had been seen by some as being the result of him being too liberal for Burke, who has acted as the Vatican's liaison with the Order since being sidelined from more important roles by Francis.
Others said the issue was whether the Vatican was properly kept in the loop and whether Von Boeselager, who has a brother who is said to be close to Francis, was wrongly informed the pope had approved his sacking.
Burke is a prominent conservative figure who has been outspoken in his criticism of Francis's efforts to reform Church teaching on questions related to the family, marriage and divorce.
Reports in the specialist Catholic press suggested Von Boeselager was targeted because Order charities he oversaw had taken part in a programme distributing free condoms to prostitutes and others in Myanmar to prevent the spread of AIDS.
Von Boeselager had claimed that he stopped the Order's involvement as soon as he became aware of it and refused to resign. Burke reportedly insisted he had to go.
Conservatives say any use of condoms violates Church teaching that considers all forms of contraception to be an unacceptable barrier to life.
Francis and his predecessor Benedict XVI have both adopted a more flexible stance, signalling that the use of condoms can be acceptable in circumstances where their use preserves life, such as in AIDS-ravaged communities.
The Order of Malta was founded in Jerusalem in 1048 as a community of hospitals caring for the sick.
It was recognized by the pope in 1113, and now operates in 120 countries, managing hospitals and clinics, with 13,500 members and 100,000 employees and volunteers.
Burke was one of four cardinals who wrote to Francis last year openly questioning the pontiff's revision of Church guidance to allow priests to decide on a case-by-case basis whether divorced and remarried believers should be able to receive communion.
Under the doctrine of the indissolubility of marriage, Catholics who divorce and remarry are deemed to be living in sin.