King Salman has appointed his nephew, the powerful Interior Minister Prince Mohammed bin Nayef, as crown prince.
The king's son, Prince Mohammed bin Salman, has been made deputy crown prince and the foreign minister, Prince Saud al-Faisal, has been replaced.
King Salman, 78, acceded to the throne in January after the death of his half-brother Abdullah bin Abdul Aziz.
Abdullah, who was thought to be aged about 90, had been on the throne since 2005 and Saudi Arabia's de facto leader for 10 years before that.
The BBC's Kim Ghattas, who was recently in Riyadh, says this latest reshuffle shows King Salman is firmly turning the page on the era of his predecessor.
He has pushed aside allies of the late monarch such as his half-brother Muqrin bin Abdul Aziz, who until Wednesday was crown prince.
The rise of Prince Mohammed bin Nayef, 55, and Prince Mohammed bin Salman, the defence minister believed to be in his early 30s, means that for the first time a grandson of the kingdom's founder, King Abdul Aziz, is in line to rule.
Both men will continue in their ministerial roles.
Mohammed bin Salman, the defence minister, has been made deputy crown prince
The appointment of Prince Mohammed bin Nayef as crown prince and deputy premier is likely to be welcomed by the United States, with whom he has a close relationship, our correspondent says.
The kingdom's veteran security chief, he is known for his strong stance against jihadist militants and narrowly survived an assassination attempt by al-Qaeda in the Arabian Peninsula suicide bomber in 2009.
The new Deputy Crown Prince and Second Deputy Premier, Mohammed bin Salman, has enjoyed a meteoric rise within the Saudi leadership.
He was appointed defence minister in January, and in the last month has been overseeing a military operation by a Saudi-led coalition against Houthi rebels in Yemen.
King Salman has employed a more assertive, muscular foreign policy to push back against Saudi Arabia's regional rival Iran, our correspondent says. These new appointments reinforce that trend, she notes.
Crown Prince Mohammed bin Nayef
- First grandson of the kingdom's founder, King Abdul Aziz, to join line of succession
- Aged 55; son of late former Crown Prince, Nayef bin Abdul Aziz, and nephew to new King Salman
- Became assistant interior minister in 1999 and led crackdown on jihadist militants after 9/11
- Narrowly survived assassination attempt by al-Qaeda suicide bomber in 2009
- Succeeded his father as interior minister in 2012 following his death
- Named crown prince and deputy premier in 2015; will continue as interior minister
A royal decree announced the reshuffle, and said Prince Saud al-Faisal, who has been in post for almost four decades, had "asked to be relieved from his duties due to his health condition".
The 75 year old will be replaced by the Saudi ambassador to the US, Adel al-Jubeir, whose appointment is a rarity because such a position normally goes to a member of the royal family.
Meanwhile, the most senior woman in the Saudi government, Nora al-Fayez, has been removed as deputy education minister for girls, a post she had held since 2009.
She had sought to introduce sports programmes for girls in state-run schools, something opposed by religious conservatives.
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