The government-run Tan Tock Seng Hospital said that Roy Ngerng Yi Ling, 33, was dismissed with immediate effect from his job as a patient coordinator for "misusing working time, hospital computers and facilities for personal pursuits".
Lee sued Ngerng for damages last month after the blogger accused him of corruption, a sensitive issue for officials in the city-state that guards closely its reputation as among the world's least corrupt nations.
Ngerng's employer said in a statement that "neglect of duty and his improper public conduct have compromised his work performance".
The offending blog post of May 15 suggested that the prime minister who is also the chairman of state investment fund GIC, had misappropriated cash from the state pension fund, Lee's lawyer Davinder Singh said.
Ngerng, who regularly posts social commentary on his blog "The Heart Truths", said politics was behind his removal.
"I had wanted to give my employers the benefit of the doubt, but the truth of the matter is that my sacking is politically motivated," he told AFP.
Lee filed the defamation suit -- the first ever brought by a Singapore leader against an online critic in the Singapore High Court, where the typical minimum value of damages claims is Sg$250,000 ($200,000).
Lee had earlier rejected an apology and dismissed as "derisory" a compensation offer of Sg$5,000 from Ngerng. The court will have the final say on the amount to be awarded.
A rally in downtown Singapore on Saturday organised by Ngerng and other bloggers demanding reforms in the state-run pension fund attracted over 2,000 Singaporeans.
The protesters claimed that the government -- through GIC and Temasek Holdings -- utilises the pension fund to invest in various assets worldwide, but that the interest rate it gives to contributors is much lower than what it earns on the investments.
The government denies the allegations.
Local media in Singapore is tightly controlled, leaving amateur bloggers as the strongest critics of the long-ruling People's Action Party.
Media firms like Bloomberg, The Economist and the Financial Times have previously paid damages and apologised to Singapore leaders including Lee and his father, former prime minister Lee Kuan Yew, for publishing articles found to be defamatory.
International human rights groups have accused Singapore leaders of using financially ruinous libel actions to silence critics and political opponents.
The Lees and other ruling party leaders say the lawsuits are necessary to protect their reputations from unfounded attacks.(AFP)
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