Pope Francis banished a German Roman Catholic prelate known as the "luxury bishop" from his diocese on Wednesday for spending 31 million euros ($43 million) of Church funds on his residence at a time when the pontiff is stressing austerity.
But the pontiff stopped short of dismissing him outright, a step which many German Catholics and the media had called for.
In a highly unusual move, Bishop Franz-Peter Tebartz-van Elst of Limburg was ordered to leave his diocese while an investigation and audit into cost over-runs is held, a Vatican statement said.
The bishop, who met the pope on Monday, "was currently not in a position to carry out his episcopal ministry". It said he should stay outside his diocese "for a period," and that it would be administered in his absence by a vicar-general.
The issue has proven a major embarrassment for the pope, who has called for a more austere Church that sides with the poor. He has told bishops not to live like princes, and has also promised to clean up the murky finances of the Vatican bank.
The German media has dubbed Tebartz-van Elst "the luxury bishop" after an audit of his spending, ordered after a Vatican monitor visited Limburg last month, revealed the residence cost at least 31 million euros - six times more than planned.
He has apologized for any "carelessness or misjudgment on my part", but denies wrongdoing.
Tebartz-van Elst has also been accused by German magistrates of lying under oath about a first-class flight to visit poverty programs in India.
German media, citing official documents, said the residence had been fitted with a free-standing bath that cost 15,000 euros, a conference table that cost 25,000 euros and a private chapel for 2.9 million euros.
The pope's decision on the fate of Tebartz-van Elst was unusual because it appeared to leave him in limbo, falling somewhere between a suspension and an outright dismissal.
This was apparently to buy time for the Vatican and German Church leaders to review the situation in the troubled diocese along with its broader ramifications.
Archbishop Robert Zollitsch, head of the German bishops' conference, said he hoped the decision would herald "a space that will allow a return to inner serenity and create a new basis for dialogue".
The "luxury bishop" story has deeply embarrassed a Church enjoying an upswing in popularity thanks to Pope Francis's mass appeal and following years of criticism for hiding sexual abuse cases among clergy.
Tebartz-van Elst, 53, is 22 years away from official retirement age in the Church and his saga represents an extraordinary management quandary for the Vatican.
Even if he eventually steps down from the diocese of Limburg, he would retain the title and rank of bishop, meaning the Vatican would have to find another post for him somewhere.
Last week, while the Vatican and the German Church were in crisis mode over the Limburg case, Tebartz-van Elst was kept waiting for eight days in Rome before the pope received him.
The scandal has also put pressure on German bishops for more financial transparency in the entire Church in their country, forcing them to scrap centuries of secrecy over the reporting the value of their private endowments.
Alois Glueck, president of the Central Committee of German Catholics, the country's main lay Catholic group, said in a statement that all German Catholics had a right to "full transparency" about the building costs.
Germany's church tax, collected by the state and handed over to the churches, raised 5.2 billion euros for the Catholics and 4.6 billion euros for Protestants in 2012.
According to some media reports in Germany, the Limburg scandal has prompted more Germans to decide to formally leave the Church.
(Additional reporting by Tom Heneghan and James Mackenzie; Editing by James Mackenzie, Mark Heinrich and Mike Collett-White)