Malawi President Joyce Banda dissolved the cabinet on Thursday after police arrested several junior officials in her government in recent weeks on suspicion of stealing state funds.
Her office announced the move on Thursday and said that Banda would announce a new cabinet in due course, without elaborating.
About 10 junior government officials have been arrested so far for suspected graft.
A small group of protesters marched in the capital city of Lilongwe on Thursday and delivered a petition calling for the sacking of top officials, including Finance Minister Ken Lipenga, over the scandal.
Earlier on Thursday, the European Union warned that it would not release a scheduled budget finance of 29m euros in December to the aid-dependent country until the government deals with a widespread multi-million dollar treasury fraud.
"There is need for a clean-up before we make our disbursement," Alexander Baum, the head of the EU mission in Malawi, said in a statement.
The southern African country is bankrolled to up to 40 percent by foreign donors and prosecutors estimate that one-third of Malawi\’s revenue is lost to fraud and ghost workers.
Banda, who faces election next year, has won acclaim in the West for austerity measures and gestures to bolster the economy of the country.
But moves such as an IMF-backed devaluation of the kwacha currency have stoked inflation, raised the price of food for rural poor and cut into Banda\’s domestic support.
A top treasury official, who was on the verge of busting a corruption ring, was shot and seriously wounded last month by a gunman in what Banda suspects was a targeted attack to silence him.
Source: Reuters and agencies