"The Holy See deems it appropriate to authorise a period of leave from the diocese for Franz-Peter Tebartz-van Elst," the Vatican said in a statement.
"The Holy Father has been continuously and objectively informed of the situation," it said.
"A situation has been created in which the bishop can no longer exercise his episcopal duties."
It did not specify how long the bishop would have to stay away but added that this would depend on an analysis of the finances of his Limburg diocese and the responsibilities for its high costs.
His private quarters in a new diocesan building are reported to have cost some 2.9 million euros (USD 3.9 million) and included a 63-square-metre dining room and a 15,000 euro bathtub -- using the revenue from a religious tax in Germany.
The reports have caused a scandal in Germany and sparked calls for greater transparency in Catholic Church finances -- a reform aim of the new pope who has called for a "poor Church for the poor".
The 53-year-old bishop is under fire over the ostentatious building project in the ancient town of Limburg, which includes a museum, conference halls, a chapel and private apartments.
The project was approved by his predecessor and was initially valued at 5.5 million euros but the final bill ballooned to 31 million euros, including a 783,000-euro garden.
Tebartz-van Elst is also accused of giving false statements in court about an expensive flight he took to India to visit poor communities.
Anger that taxes paid to the Church by ordinary Germans are apparently being squandered has led to demonstrations outside his residence.
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