Mr Ismael Sueno, who supervised Mr Duterte's war on drugs that has left thousands dead, was sacked on the spot at a Cabinet meeting late on Monday, presidential spokesman Ernesto Abella said in a statement.
Sueno had a reported rift with his three undersecretaries, who accused him of corruption, shielding a politician linked to illegal drugs, and other wrongdoing.
"The secretary had, in fact, been instrumental in convincing the president to run for election, but this did not deter the President from pursuing his drive for a trustworthy government by addressing issues like corruption", he added.
Presidential spokesman Ernesto Abella said Cuy's designation to temporarily lead the DILG took effect immediately following the dismissal of Secretary Mike Sueno. He also served as former Davao City Police chief. "I have said there will be no corruption in my government", he said.
He did not say who would replace Sueno, though there has been speculation Duterte would appoint Ferdinand Marcos Jnr, son of the late Philippine dictator.
According to a report of Monday's cabinet meeting, Duterte was particularly incensed by one allegation related to the purchase of fire trucks from Austria, which cost twice as much as they would have from other sources.
Sueno supported Duterte's presidential bid past year and had previously served as a mayor and a governor.
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He told the Star that he asked Duterte in a meeting last month to remove Undersecretaries John Castriciones (Operations); Jesus Hinlo (Public Safety); and Emilie Padilla (Legislative Liaison and Special Concerns), citing "irreconcilable differences".
Sueno said he would accept his fate but maintained his innocence over the allegations of corruption.
"I respect the president's decision but I am not corrupt", Sueno, 69, said in a statement.
Duterte on Sunday announced that he will be dismissing an official in government over alleged corruption charges but declined to give details.
The first to leave government was the President's former campaign spokesman, Peter Laviña, who headed the National Irrigation Administration.
It's not clear if Sueno will be formally investigated or prosecuted.