Yoav Gallant had spoken out against controversial plans to overhaul the justice system.
In Jerusalem, police and soldiers used water cannon against demonstrators near Mr Netanyahu’s house.
Early on Monday morning, Israel’s President Isaac Herzog called on the government to halt the reforms.
“For the sake of the unity of the people of Israel, for the sake of responsibility, I call on you to stop the legislative process immediately,” he said on Twitter, adding that “the eyes of all the people of Israel are on you”.
The US also said it was deeply concerned about the developments and called for a compromise.
A week of disruption had already been planned over the new law.
The reforms include plans that would give the government decisive control over the committee which appoints judges.
They would also make it harder for courts to remove a leader deemed unfit for office, which has angered many who consider it in the interests of the incumbent, Benjamin Netanyahu, who faces an ongoing trial for corruption.
Mr Netanyahu says the reforms are designed to stop the courts over-reaching their powers and that they were voted for by the public at the last election.
After protesting outside Mr Netanyahu’s home, the demonstrators – many flying Israeli flags and banging pots and pans – then evaded police forces to arrive at Israel’s parliament, the Knesset.
One government employee told the BBC that she felt Mr Netanyahu “crossed every line we have as a democratic country”.
“We’re defending the last bit of democracy we have and I can’t go to sleep this way. I can’t do anything until we stop this craziness”, she said.
In Tel Aviv, flag-waving protesters blocked one of the main highways for more than two hours, before they were cleared by mounted police and water cannon.
Mr Gallant is a former soldier, who for weeks has heard from reservists who were unhappy with the proposed law change.
In early March, fighter pilots in an elite Israeli Air Force squadron vowed not to attend training, in an unprecedented protest against the government.
They later agreed to attend and hold talks with their commanders.
Mr Gallant spoke out against the law on Saturday, where he said members of the Israeli Defence Forces were angry and disappointed.
Mr Netanyahu – who was out of the country at the time of Mr Gallant’s TV appearance – said he no longer had faith in him as defence minister.
The prime minister wants to get the new legislation through parliament by the end of the week.
The two politicians are members of the same Likud party and while the defence minister won the backing of some fellow members, others on the far right called for him to go.
After he was fired, Mr Gallant took to Twitter to reaffirm: “The state of Israel’s security has always been and will always be my life’s mission.”
Israel’s opposition leader Yair Lapid described Mr Gallant’s sacking as “a new low” for the government.
“Netanyahu can fire Gallant, but he can’t fire reality or fire the people of Israel who are fronting up to resist the coalition’s madness,” Mr Lapid added.
A White House spokeswoman raised US concerns about the situation, saying: “As the president recently discussed with Prime Minister Netanyahu, democratic values have always been, and must remain, a hallmark of the US-Israel relationship.”
She added that “fundamental changes” to a democratic system should be “pursued with the broadest possible base of popular support”.
“We continue to strongly urge Israeli leaders to find a compromise as soon as possible.”
