Abushagur was dismissed after failing twice to win approval from the General National Congress for a new administration.
Abushagur had told the GNC that he wanted a scaled-down Cabinet to lead post-war Libya.
"In face of the dangers threatening the country, I present to you a crisis government restricted to 10 ministers, rejecting all geographical considerations," he was quoted by the BBC as saying.
The vast majority of the 186-member assembly voted against his proposals. His previous effort to form a new Cabinet failed Thursday when lawmakers said it wasn't representative. The BBC reports that leaders from former rebel strongholds like Misurata and Benghazi wanted more representation in the new government.
U.S. agencies are investigating the Sept. 11 attacks on the U.S. consulate in Benghazi. Attacks, which the U.S. government described as terrorism, left the U.S. ambassador to Libya and three of his staff members dead.
Aubshagur served as deputy prime minister in the wake of the death of Libyan leader Moammar Gadhafi, who died after falling into rebel hands during last year's civil war.
The GNC has less than a month to select a new candidate for prime minister.