Free State ANC deputy chairman Pat Matosa said the decision by the party's provincial working committee (PWC) was taken in the interests of stabilising local government at all levels.
"...specifically at the political management and leadership level," Matosa told journalists in Bloemfontein.
Matosa said this move came after the committee had received a detailed "political report" on the situation in the Mangaung municipality and decided to "take decisive political correct decisions".
Mokoena has been removed from his positions as mayor, chairman of the Motheo regional executive committee on economic transformation, and member of the Motheo regional working committee.
Five probed on fraud allegations
Matosa said: "Disciplinary action shall be taken against comrade Papi Mokoena for not adhering to a legitimate political instruction of the ANC still adhering to agreed voluntary leave of absence he has taken."
Mokoena, one of five senior municipal officials investigated by the Scorpions on allegations of fraud and corruption, returned to work last Monday from voluntary leave. The period of leave had not yet expired.
The leave began soon after his arrest in July.
The Scorpions arrested Mokoena, his wife, Granny, city manager Mojalefa Matlole, chief operating officer Mzwandile Silwana, speaker Zongezile Zumane and Mokoena's political adviser, Jacob Thithi, at the same time.
Consolidating ANC unity
However, Matosa said on Tuesday the latest political decisions had no bearing on the case in Bloemfontein High Court or on internal administrative processes at the Mangaung municipality.
"The committee's decision was taken in the interest of consolidating and deepening the unity of the organisation (the ANC)," he said.
The party confirmed that Eva Moiloa would continue to act as mayor until the Mangaung municipal council decided otherwise.