In a painful press conference at Downing Street, the PM confirmed she'd axed her "great friend" Kwasi Kwarteng and replaced him with former foreign and health secretary Jeremy Hunt. ITV News Political Editor Robert Peston reports
She reversed her policy to scrap the planned rise in corporation tax from 19% to 25% - meaning it will now go ahead.
Jeremy Hunt has replaced Mr Kwarteng, who had spent just a month in the job.
Mr Kwarteng flew back to London early for crunch talks with the prime minister on Friday, before confirming he was stepping down in a letter to Ms Truss.
Within it he defended his actions after weeks of markets turmoil, saying "following the status quo was not an option".
But he conceded that "the economic environment has changed rapidly since we set out the Growth Plan on 23 September".
Responding to the letter, Ms Truss thanked Mr Kwarteng and said he was a "long-standing friend and colleague" who she was "deeply sorry" to lose from the government.
She praised the intervention into energy bills as "one of the most significant fiscal interventions in modern times".
He has been replaced by Mr Hunt, a former health secretary and previous candidate for the Tory party leadership.
Liz Truss's move to sack Kwasi Kwarteng was supposed to settle spooked markets, but will it work? ITV News Economics Editor Joel Hills reports
The managing director of the International Monetary Fund (IMF), Kristalina Georgieva, told ITV News that she wishes Mr Hunt "all the success" in the role.
"I have strong confidence in the UK's institutions and their ability to take decisions that are prudent and are able to bring in an environment we face ourselves today that is a complex environment of confidence to the British people," she said.
Alongside the change of chancellor the chief secretary to the Treasury, Chris Philp, has become the new paymaster general and minister for the Cabinet Office. His former role was taken by Edward Agar.
After the reshuffle was announced the prime minister held a Downing Street press conference, on Friday, where she U-turned on plans to cut corporation tax.
'I wish the new chancellor all the success'
Truss confirms U-turn on corporation tax
In a press conference, Ms Truss confirmed that she was U-turning on her decision to reduce corporation tax.
It means that corporation tax will rise in line with what the previous government promised.
She said she was elected by her party to deliver a “low tax, high wage, high growth economy” and “that mission remains”.
Ms Truss added that she will “always act in the national interest".
Is Kwasi Kwarteng’s dismissal enough to shore up the prime minister’s position?
“We will get through this storm," she said.
Responding to questions from reporters, Ms Truss said she wouldn't resign. “I am absolutely determined to see through what I have promised," she said.
After regaining some ground this morning the pound fell back after the conference.
Since then, however, cabinet ministers have begun tweeting their support for the prime minister.
Deputy prime minister and close ally Therese Coffey tweeted: “The PM is right to act now to ensure our country’s economic stability - key for families and businesses - and reassure the markets of our fiscal discipline, especially in light of the worsening global economic conditions with Putin’s illegal invasion of Ukraine.”
In her letter to Mr Kwarteng, Ms Truss added: "I deeply respect the decision you have taken today. You have put the national interest first."
The chancellor was attending the IMFs annual meeting in Washington DC over the weekend but returned early this morning, amid an emerging market consensus that a U-turn on tax cuts was imminently on the cards.
Having spoken to MPs following the prime minister's press conference, ITV Deputy Political Editor Anushka Asthana said the "overwhelming mood is that Liz Truss will be gone soon".
"I’d say opinion of MPs right now is significantly harsher than after Boris Johnson appeared to have misled folk about Chris Pincher," she said.
Kwasi Kwarteng leaves Downing Street after standing down as chancellor
With his resignation, Mr Kwarteng becomes the UK's shortest-serving chancellor since 1970.
His successor, Mr Hunt, will be the fourth finance minister in as many months at a time when millions are facing a cost of living crisis.
The only other chancellor to serve a shorter time than Mr Kwarteng died unexpectedly while in office.
The prime minister’s key pledge to scrap the planned increase in corporation tax from 19% to 25% is widely seen as a likely casualty in the coming days, as Ms Truss seeks to save her embattled premiership.
ITV News Political Editor Robert Peston wrote earlier that he is confident Ms Truss will cancel the promise not to increase corporation tax by six percentage points to raise £18billion, in one of the "most humiliating ever tax U-turns".
Markets steadied on Friday amid expectations of an imminent row back from the government.
They had been spooked on Thursday when the Bank of England (BoE) said its emergency bond-buying scheme would end the following day.
The BoE stepped in two weeks ago after the mini-budget sent markets into chaos amid concerns over higher borrowing costs, triggering concerns in particular about the fate of pension funds.
The justification for the government’s aggressive tax cuts revolved around securing an increase in economic growth - with a target of an annual rise of around 2.5% in gross domestic product (GDP).
But announcing such a large package of cuts alongside an even more expensive plan to tackle the energy bill crisis without revealing how they would be paid for caused turmoil.
There have been reports that senior Tories are plotting the possibility of replacing Ms Truss with a joint ticket of Rishi Sunak and Penny Mordaunt, with the Times newspaper also reporting that party grandees are considering replacing her with a “unity candidate”.
ITV News UK Editor Paul Brand wrote that one Tory MP commenting on the reports Ms Mordaunt and Mr Sunak could launch a joint ticket bid told him “it seems quite sensible” - while another questioned the exact combo but said some sort of unity ticket is the only option.
Meanwhile, a new poll released by People Polling today showed Labour with more than double the support of the Conservatives.
Watch Liz Truss' press conference at Downing Street after sacking Chancellor Kwasi Kwarteng
In the wake of Mr Kwarteng's dismissal Labour leader Sir Keir Starmer said his sacking does not “undo the damage” already inflicted.
He tweeted: “Changing the chancellor doesn’t undo the damage made in Downing Street.
“Liz Truss’ reckless approach has crashed the economy, causing mortgages to skyrocket, and has undermined Britain’s standing on the world stage.
“We need a change in government. With my leadership, Labour will secure Britain’s economy and get us out of this mess.”
The government's recent decision-making has created a vicious cycle of economic and political reactions which Liz Truss is trying to break. ITV News' Ben Chapman spoke to the people of Derbyshire to see if they were convinced
Elsewhere, the leader of the Scottish National Party (SNP), Nicola Sturgeon, has called on Ms Truss to resign as prime minister, describing the sacking of Mr Kwarteng as "beyond a joke".
"I think the only decent thing that Tory backbenchers can do now is call time on Liz Truss and this entire UK government, and allow people across the UK to have a general election,” the first minister told broadcasters.
Want a quick and expert briefing on the biggest news stories? Listen to our latest podcasts to find out What You Need To Know...