Grand Master Matthew Festing resigned his lifetime position Tuesday, at the request of Pope Francis, effectively putting an end to a prolonged stand-off that had become a test of the reforming pope's authority over rebellious Church conservatives.
The sovereign council thanked Festing in a press release "for his great commitment during his nine years in office" and said the pope had been notified of its decision.
The council also said it accepted the Vatican's decision to name a papal delegate to oversee "the spiritual renewal of the Order," a Church-linked charity body descended from the crusaders of the Middle Ages.
The Order's number two, Grand Commander Ludwig Hoffmann von Rumerstein will serve as the Knights' interim chief until a new head is elected.
In what was a key sticking point of the dispute, the sovereign council also reinstated the Order's number three, Grand Chancellor Albrecht von Boeselager, dismissing disciplinary actions against him.
Von Boeselager's dismissal last month sparked the unprecedented and very public row between the Vatican and the Knights.
Francis appointed a five-strong team to examine the circumstances in which von Boeselager was forced out of his job, but the Knights refused to cooperate. 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.
Conservatives say this violates Church teaching but it has been deemed acceptable by Francis and his predecessor Benedict XVI.
The dispute was seen by Holy See watchers as a proxy war between Church liberals and conservatives, led by American cardinal Raymond Burke, who has acted as the Vatican's liaison with the Order since being sidelined from more important roles by Francis.
Burke is a prominent conservative figure who has been outspoken in his criticism of Francis' efforts to reform Church teaching on questions related to the family, marriage and divorce.
Von Boeselager's dismissal was widely interpreted as being the result of him being too liberal for Burke's tastes. The Order of Malta was founded in Jerusalem in 1048 as a community of hospitals caring for the sick.
The Order was recognised by the pope in 1113 and operates in 120 countries, managing hospitals and clinics, with 13,500 members and 100,000 employees and volunteers.
In its press release, the sovereign council said it was "most grateful" to Pope Francis for his "interest in and care for the Order".