He said Ivanov will oversee military industry and a part of the civil economic sector in his new post.
"In these conditions, he will not be able to perform the duties of defense minister," Putin said.
Ivanov, 54, became defense minister in March 2001 and deputy prime minister in November 2005.
He said Anatoly Serdyukov, 45, who headed the Federal Tax Service for the last three years, will be the new defense minister.
"The prime minister has repeatedly raised the necessity of changing the government's structure. One of the main problems is giving the Russian economy more innovative features," Putin said.
He said he hopes "the civil sector will help expand the positive experience in the military industrial sector."
Putin said the sector saw a $6 billion growth last year due to an increase in Russia's arms exports.