The assembly's MEPs voted 625 to one to strip Greek socialist MEP Eva Kaili of her vice presidential role, despite her lawyer declaring that she was innocent and "has nothing to do with Qatar's bribes."
She was arrested last week during a series of raids by Belgian graft investigators on the homes and offices of several MEPs and their assistants or associates.
The parliament's president, Maltese conservative Roberta Metsola, called the vote after reaching agreement with the leaders of the parliament's political groupings, amid fears the scandal will spread.
Belgian prosecutors said 600,000 euros ($630,000) were found at the home of one suspect, 150,000 euros at the flat of an MEP and several hundred thousand euros in a suitcase in a hotel room.
Some of these "bags of cash" were found in Kaili's home, a judicial source said, leading a judge to conclude that, as she had apparently been caught red-handed, her parliamentary immunity from prosecution would not apply.
A Belgian judicial source told AFP that investigators believe that figures representing Gulf monarchy Qatar had been paying off European politicians to burnish the country's image.
Kaili visited Qatar just before the competition and called it a "front-runner in labour rights", to the consternation of activists and some of her colleagues. She has also defended Qatar's quest to win EU visa waivers for its citizens.
Qatar has denied any involvement in European corruption. "Any claims of misconduct by the State of Qatar are gravely misinformed," an official told AFP.
Kaili's lawyer Michalis Dimitrakopoulos told private Greek television channel Open TV: "Her position is she is innocent. She has nothing to do with Qatar's bribes."
Asked if any cash was found at Kaili's home, Dimitrakopoulos said: "I am not confirming or denying. There is confidentiality. I have no idea if money was found or how much was found."
As the 44-year-old former TV news presenter sat in a Brussels jail cell, her colleagues in the Strasbourg parliament are scrambling to distance themselves from the taint of scandal.
On Wednesday, a Belgian judge will decide whether to maintain Kaili and three co-accused in custody pending trial.