President Leonid Kuchma told a cabinet meeting that Masol had tendered his resignation, a presidential spokesman said.
Parliament must still approve the resignation, but First Deputy Prime Minister Yevhen Marchuk was appointed acting premier and officials said Masol was expected to leave on a long holiday.
"The president expects that Masol's resignation will reflect positively on the process of reforming the economy," spokesman Mykhailo Doroshenko said. "But there will be no drastic changes in the course of economic reforms."
Masol had long been expected to quit as he had frequently made statements at odds with Kuchma's reformist policies. But the timing was something of a surprise.
He was prime minister when Ukraine was still a Soviet republic, resigning in 1990 when university students staged mass demonstrations in Kiev to demand his dismissal.
Former president Leonid Kravchuk reappointed him to the job just over a week before losing 1994 elections to Kuchma, who had formerly been prime minister.
Supporters of Kuchma's Western-backed reform program, forced through parliament three months after his election, crowed approval at Marchuk's appointment.
"This change in government can only be described as a positive move," central bank chairman Viktor Yushchenko told reporters. "Marchuk is a man capable of consolidating people around him."
Marchuk took charge of the Ukraine's SBU security service, the successor to the Soviet KGB, in late 1991 before Ukraine won independence from the Soviet Union. Under Kuchma, he became one of three first deputy prime ministers and headed a special committee on fighting corruption.
Marchuk is likely to be a palatable choice for parliament, bitterly divided between conservatives and reformers and often antagonistic toward Kuchma.
He earned a reputation as a businesslike defender of Ukraine's interests as head of a government delegation in talks with Russia which led to the initialling last month of a long-delayed friendship treaty with Moscow.
Western diplomats said Masol's departure and Marchuk's appointment were positive signs for economic reforms. "Clearly they don't want to replace Masol with a radical reformer," one diplomat said, referring to First Deputy Premier Viktor Pynzenyk, also discussed as a replacement for Masol.
"But he's an improvement. Masol was a retread, behind the times. The economy isn't Marchuk's baby, but he will have a pragmatic, non-ideological approach towards reforms."
After drafting its first post-Soviet reform program last year, Ukraine won an initial International Monetary Fund loan of $370 million to shore up its crippled economy.
It is now seeking a further $1.3 billion stand-by loan, but that is contingent on completion of a satisfactory budget and elaboration of other reforms.
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