It had been widely expected but the timing has surprised many.
The move was supported by 31 out of 34 senior royal members.
But questions remain over the 31 year-old's lack of experience and, as some suggest, impulsiveness.
In a series of royal decrees announced just after midnight in Saudi Arabia, 81 year-old King Salman stripped Prince Mohammed bin Nayef of his title as crown prince and his position as the country's interior minister overseeing security.
In his stead, 31 year-old Mohammed bin Salman has now been elevated to the position of Crown Prince and Deputy Prime Minister.
The King also amended the law to allow succession to move from father to son, rather than from brother to brother - the system which had been in place since 1933.
Professor Amin Saikal is Director of the Centre for Arab and Islamic Studies at the Australian National University.
He says Mohammed bin Salman's political star has been on the rise ever since the succession of his father to the throne of Saudi Arabia in January 2015.
"Well I think there had been speculation but at the same time there had been quite a bit of rivalry between Prince Salman and his cousin, Prince Mohammed bin Nayef, who is Minister of Interior and Crown Prince. But now obviously Prince Nayef is completely out of the way and it is really Prince Salman who is going to be running the show in Saudi Arabia in both domestic and foreign policy."
Also known by his initials, MBS, the Prince has been able to forge a close relationship with the Trump administration -- he was instrumental in inviting President Trump to Riyadh.
The two have already talked on the phone, reportedly discussing the crisis over Qatar as well as the Middle East conflict.
Rami Khouri, from the American University in Beirut, says there's a clear link between Qatar, President Trump's Saudi visit and the leadership change.
"They all go together in one package. Mohammed bin Salman is somebody who has cultivated the American Trump administration very intensely and personally with visits there. The Americans seem to like what he is proposing, and there is definitely a link between Trump's support for the Saudis and the policy on laying siege to Qatar. So these things are all related."
Last year Prince Salman introduced 'Vision 2030', an ambitious plan to diversify Saudi Arabia's economy beyond oil.
He oversaw the part-privatisation of Saudi Arabia's state oil company, Aramco, and also sought to bringing limited social freedoms in a country where most of the population is under 30.
But Amin Saikal says there has been criticisim of Prince Salman, particularly in being very hawkish and bombastic in his approach not only to domestic reforms but also foreign policy actions.
"He has been at the forefront of the war in Yemen and isolation of Qatar as well as Saudi Arabia's enmity with Iran. And in fact he has singled out Iran as the major threat to regional stability and therefore also supporting international terrorism."
Iran, meanwhile, has labelled Prince Mohammed's appointment a "soft coup".
The two countries support opposite sides in the conflicts in both Syria and Yemen.
And it's in Yemen that Prince Mohammed's role as Defence Minister has proved controversial.
He launched the military campaign there in March 2015 along with a coalition of other Arab states, against the Houthi rebel movement.
But in two years only limited progress has been made, with Saudi Arabia accused of human rights violations as well as triggering a worsening humanitarian crisis.
Rami Khouri says Yemen is a huge problem for Prince Salman.
"The question is will he continue the same policies that he has been pursuing in Yemen, and other places and internally, or will there be any change? We don't know what are the internal consequences politically of this appointment, whether a lot of the older princes will be upset that they were left out, that they didn't get their chance to be in the ruling."
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