Iran's Supreme Leader Ayatollah Ali Khamenei has ordered President Mahmoud Ahmadinejad to dismiss his choice to serve as vice-president, state TV says.
Appointing Esfandiar Rahim Mashaie was "against your interest and the interests of the government", the ayatollah wrote to Mr Ahmadinejad.
His remarks came after another leading cleric also demanded the dismissal.
Mr Mashaie had caused controversy in 2008 when he said Iranians were friends with the Israelis.
According to Iranian state TV, Ayatollah Khamenei sent Mr Ahmadinejad a clear message.
"It is necessary to announce the cancellation of this appointment," he told the president.
Mr Ahmadinejad, who is known for his own outspoken views against Israel, has previously defended Mr Mashaie, calling him modest and loyal to Iran's Islamic system.
Hardline students
Hundreds of hardline students took to the streets of the capital, Tehran, in support of the demand for Mr Mashaie to stand down.
They warned they would withdraw support from Mr Ahmadinejad unless he dismisses Mr Mashaie.
During their demonstrations they chanted that defiance of Ayatollah Khamenei's views would not be tolerated, the semi-official Fars news agency reported.
Ayatollah Khamenei has the final say in matters of state, and analysts say he has rarely faced defiance in the past - though that changed in recent weeks with reformists challenging his ruling that last month's disputed presidential election was fair.
Correspondents say the deepening rift between the supreme leader and Mr Ahmadinejad comes at a precarious time for the president.
They say he needs hardline support against the reformist opposition who continue to maintain that his re-election was fraudulent.
The row over Israel broke out last year when Mr Mashaie, then minister in charge of tourism, was quoted as saying that Iranians were friends with the Israeli people, despite the conflict between their governments.
"Today, Iran is friends with the American and Israeli people," he said, according to the semi-official Fars News Agency. "No nation in the world is our enemy."
