Mr Smith was removed from his job as shadow Northern Ireland secretary after attacking Brexit and urging the Labour Party to campaign for a second EU referendum in a newspaper article.
He is replaced by the veteran former minister Tony Lloyd, who only returned to the Commons last year after quitting as an MP in 2012 to become police and crime commissioner for Greater Manchester.
With Mr Corbyn already under attack over his response to the Russian poisoning crisis and rows in the party over anti-Semitism, Mr Smith’s sacking threatens to reopen the civil war in the Labour Party.
Immediately after his dismissal, a defiant Mr Smith tweeted: “Just been sacked by @jeremycorbyn for my long held views on the damage #Brexit will do to the Good Friday Agreement & the economy of the entire U.K.
“Those views are shared by Labour members & supporters and I will continue to speak up for them, and in the interest of our country.”
And within minutes there was a wave of support for Mr Smith on Twitter from Labour MPs critical of Mr Corbyn.
Former Northern Ireland secretary Peter Hain tweeted: “This is a terrible Stalinist purge @OwenSmith_MP has been doing a terrific job on Northern Ireland.
“He’s ideal for the role with his experience expertise and considerable ability. Widely respected. In a Shadow Cabinet with few big hitters he was definitely one.”
Former Shadow Cabinet member and leading Remainer, Chuka Umunna, said: “It’s extraordinary that a Shadow Cabinet member – doing an excellent job in their brief – should be sacked for standing up for our principles and advocating a Brexit policy that commands the overwhelming support of our members, supporters and voters. What has happened to our party?”
Labour MP Angela Smith tweeted: “@OwenSmith_MP took a principled position today re single market and customs union. Vindictive response from leadership a mistake.”
And another MP, Wes Streeting, added: “If only anti-semites were dealt with as swiftly and severely as Remainers.”
Announcing Mr Smith’s sacking, the Labour Party said: “Owen Smith MP has been asked to stand down as Shadow Northern Ireland Secretary, and has been replaced by Tony Lloyd with immediate effect.”
Mr Corbyn said: “Tony is a highly experienced former Government Minister who is committed to ensuring that peace in Northern Ireland is maintained and helping to steer the devolution deal back on track.”
Mr Lloyd said after his appointment: “As we leave the European Union, ensuring there is no hard border between Northern Ireland and the Republic is of paramount importance and this will be my number one priority.
“This is an incredibly important job, with a huge in-tray and I am looking forward to starting work.”
Mr Smith’s dismissal came within hours of him breaking ranks with Mr Corbyn by reopening the question of whether Brexit is “the right choice for the country”, and urging Labour to offer the public a referendum on the final deal.
The Pontypridd MP, who challenged Mr Corbyn for the Labour leadership in 2016, only returned to the Shadow Cabinet less than a year ago after last year’s general election.
He has argued strongly for Labour to back a customs union with the EU27, something that has now become party policy.
But in an article for the Guardian, he said Labour could only “serve democracy” by recommending a poll on the Brexit deal.
“Labour needs to do more than just back a soft Brexit or guarantee a soft border in Ireland,” he argues.
“Given that it is increasingly obvious that the promises which the Brexiters made to the voters, especially, not only their pledge of an additional £350m a week for the NHS, are never going to be honoured, we have the right to ask if Brexit remains the right choice for the country,” he wrote.
“And to ask, too, that the country has a vote on whether to accept the terms and true costs of that choice once they are clear.”