The Bundesbank's board said it had reached a unanimous decision to fire Social Democrat Thilo Sarrazin, 65, a former Berlin city government finance minister. Under German law, the step must be approved by the country's federal president, Christian Wulff.
Mr Sarrazin's dismissal appeared almost certain as the Bundesbank's statement came just hours after Mr Wulff had urged the bank to act, warning that the increasingly heated discussion about his remarks threatened to "damage Germany internationally".
Chancellor Angela Merkel welcomed the move, saying she had "great respect" for the decision. She had previously expressed her dismay over Mr Sarrazin's racial theories and condemned them as "completely unacceptable".
Mr Sarrazin, the son of a doctor and a Prussian aristocrat, outraged Germany's Jewish community by saying in an interview that "all Jews share a certain gene". The general secretary of the Central Council of Jews suggested afterwards that he should apply for a job as spokesman for race issues in the neo-Nazi National Democratic Party.
However, most of Mr Sarrazin's criticisms have been directed against Muslims living in Germany. In a book published on Monday entitled Deutschland Schafft Sich Ab (Germany is digging its own grave), he claims that Muslim immigrants will soon outnumber indigenous Germans because of their higher birth rates, and that they are disproportionately involved in crime and dependent on the welfare state.
"I don't want the country of my grandchildren and great-grandchildren to be largely Muslim or want Turkish or Arabic to be widely spoken," he argues in his book. "I don't want women wearing headscarves or the daily rhythm set by the call of the muezzin."
Yesterday, four days after its publication, Mr Sarrazin's book was topping Amazon Germany's bestseller list. His race theories have been published widely in the mass circulation Bild newspaper and featured as a debating topic on German television talkshows.
"With no other religion is there such a fluid connection between violence, dictatorship and terrorism as there is with Islam," Mr Sarrazin also claims. Germany's Muslim community has predictably condemned his remarks.
However, some commentators have given his remarks a guarded welcome and implied that he has broken the politically correct taboos concerning race and integration that have held sway in Germany since World War II.
"A clever man has got on the wrong track here with his desire to provoke and with his theories about the rapid decline of the German people," remarked the liberal Süddeutsche Zeitung newspaper. "But he has addressed a problem that will remain long after the waves of outrage have subsided: the enormous integration deficit of the Muslim minority in Germany."
Mr Sarrazin said earlier this week that he would like to die a Social Democrat. However, this poses a problem for his centre-left party which attracts immigrant voters. Leading Social Democrats have been deliberating over calls for his expulsion. Sigmar Gabriel, the party leader, yesterday said Mr Sarrazin could remain a member if he renounced some of his ideas.
The Independant
