The decision, which one source with knowledge said was made by Trump himself, comes after the President in January authorized the reorganization of the National Security Council to include Bannon as a permanent member of the panel.
The move is a demotion for Bannon and a win for H.R. McMaster, who Trump picked in February to lead the council after Michael Flynn was fired for misleading Vice President Mike Pence about undisclosed contacts he had with Russian operatives. McMaster, an Army lieutenant general, has to date struggled to gain tangible influence inside the White House, including in issues of hiring and firing.
McMaster up, Bannon down
The decision to remove Bannon from the council is the first public diminishing of his power inside the West Wing, two senior Republicans close to the White House noted. One official was skeptical of the pro-Bannon spin from sources saying he was only there to keep eye on Flynn.
The argument that Bannon was on the council to watch Flynn ignores that fact that the former campaign adviser was Trump's top pick for national security adviser and someone the President has defended even after he asked for his resignation in February.
"General Flynn is a wonderful man. I think he has been treated very, very unfairly by the media, as I call it, the fake media in many cases," Trump said after Flynn left. "And I think it is really a sad thing that he was treated so badly."
Bannon, the source said, will still be allowed to "attend any meeting" where his expertise is needed, a more traditional structure for the National Security Council.
Ultimately, this is a diminishing move for him, official says, but "empowering for McMaster."
Multiple sources looked to minimize the removal. One argued that Bannon was put on the council to ensure that it no longer "micro-managed" foreign policy and was put on a more "operational track."
Other sources argued that Bannon was elevated to the council in order to keep tabs on Flynn. One source with knowledge described Bannon's job as "babysitting" Flynn on the council.
Another said Bannon was only on board to oversee Flynn's work to "de-operationalize" the National Security Council from the broad purview it had under Susan Rice, President Barack Obama's national security adviser.
A source with knowledge of the move said Bannon can "still attend any meeting" where his expertise is needed.
"In all the time he was there, he only attended one principals meeting," the source said. "He is still welcome to attend principal meetings."
The decision to elevate Bannon in the first place was a controversial one because, at the same time, the order indicated that the director of national intelligence and the chairman of the Joint Chiefs of Staff would not be regular attendees.
The committee is a Cabinet-level group of agencies focused on national security that was established by President George H.W. Bush in 1989.
Regular members of the Principals Committee will include the secretary of state, the treasury secretary, the defense secretary, the attorney general, the secretary of Homeland Security, the assistant to the President and chief of staff, the assistant to the President and chief strategist, the national security adviser and the Homeland Security adviser.
Former acting CIA chief Michael Morell sharply criticized the move in January, calling it "unprecedented" in an appearance on "CBS This Morning."
"I have never been to a principals' meeting where the views of the DNI and the views of the chairman are not relevant," said Morell, who advised Hillary Clinton's campaign for president. "Every principals' meeting starts with an intelligence briefing by the DNI."
Bannon's accession also demonstrated the breadth of his influence inside the White House, signaling that the former head of Brietbart News' influence extended beyond politics and domestic policy.
CNN's Nicole Gaouette, Joe Johns and Jim Acosta contributed to this report.