A statement from President Luiz Inacio Lula da Silva's office said Paulo Lacerda was temporarily removed from his post while an investigation takes place.
The scandal broke this weekend after the Brazilian news magazine Veja reported the head of Brazil's Supreme Court, members of Congress and officials close to Silva including his chief of staff and at least one Cabinet official all had their phones bugged by the intelligence agency.
The fast-developing scandal is the latest to hit Silva's six-year-old administration, which began with bold promises to clean up government.
But by 2005, presidential chief of staff Jose Dirceu had resigned after being accused of orchestrating a scheme to buy votes from lawmakers. Silva has managed to insulate himself and retains an approval rating that hovers around 70 percent.
Earlier Monday, Silva met with Chief Justice Gilmar Mendes for more than two hours to discuss the reports of wiretapping.
Veja published transcripts of what it said was a conversation between Mendes and opposition Sen. Demostenes Torres.
According to the magazine, Torres was asking Mendes for help in overturning a lower-court decision to keep a witness from appearing before his Senate committee investigating pedophilia.
Opposition leaders called for a congressional investigation, and some even said Silva could be impeached. They said even if the president knew nothing about the wiretapping, the incident indicates that the intelligence agency does not obey his command.
"The government has to show that it has control," Torres said.
The statement from Silva's office sought to address these concerns.
In addition to the suspension of Lacerda, Silva ordered his justice minister and security chief to open an investigation, separate of anything Congress might carry out.
He also asked the Justice Ministry, in coordination with the Supreme Court, to outline a law with specific punishments for state security agents who violate citizens' privacy.
The head of a congressional committee that was already investigating illegal wiretapping said he would call Silva's security chief to testify about who ordered the wiretaps.
"The charges are extremely serious," said Congressman Marcelo Itagiba, the committee head. "Something much bigger is going on, a power struggle between groups within the government."
But political analysts predicted that Silva would be able to contain the scandal before it affects his Workers Party in October municipal elections, a key test of the party's strength ahead of the 2010 presidential vote.
Low-ranking Brazilian police and security officials are known to tap the phones of politicians and others in attempts to mount extortion schemes, said David Fleischer, a political scientist at the University of Brasilia. But he said such schemes rarely reach someone as powerful as the head of the Supreme Court.
He predicted the scandal would die down if top administration officials can show they were not involved.
"If they determine it was done by freelancers, and not as part of a deliberate policy decision, there will be no real repercussions for Lula," Fleischer said.