Paetongtarn, who was Thailand's youngest prime minister, becomes the sixth premier from or backed by the billionaire Shinawatra family to be removed by the military or judiciary in a tumultuous two-decade battle for power between the country's warring elites.
The ruling paves the way for the election by parliament of a new prime minister, a process that could be drawn out, with Paetongtarn's ruling Pheu Thai party losing bargaining power and facing a challenge to shore up a fragile alliance with a razor-thin majority.
The court said Paetongtarn violated ethics in a leaked June telephone call, during which she appeared to kowtow to Cambodia's powerful former leader Hun Sen - until recently a close Shinawatra family ally.
At the time, both countries were on the brink of an armed conflict.
Fighting erupted weeks later, lasting five days.
Hours after the decision, the Bhumjaithai Party that had quit Paetongtarn's coalition over the call emerged as the early frontrunner in forming a new government.
Its leader, Anutin Charnvirakul, shuttled across Bangkok to rally support from parties, with pledges that included dissolving parliament within four months.
The ruling brings a premature end to the premiership of the daughter and protégé of divisive tycoon Thaksin Shinawatra and will be a major test of his outsized political clout.
Paetongtarn, 39, was a political neophyte when she was abruptly thrust into power after the surprise dismissal of Srettha Thavisin by the same court.
In a 6-3 decision, the court said Paetongtarn had put her private interests before those of the nation and had damaged Thailand's reputation.
"Due to a personal relationship that appeared aligned with Cambodia, the respondent was consistently willing to comply with or act in accordance with the wishes of the Cambodian side," it said.
Reacting to the decision, Paetongtarn called for all parties to work together to bring political stability to Thailand.
"All I wanted was to safeguard the lives of people, whether soldiers or civilians. I was determined to do all I could to protect their lives before the violent clashes," she said.
She is the fifth premier in 17 years to be removed by the Constitutional Court, underlining its central role in an intractable power struggle between the governments of the Shinawatra clan and a nexus of powerful conservatives and royalist generals with far-reaching influence.
The focus quickly shifted to who would replace Paetongtarn, with her father Thaksin expected to be in the thick of horse-trading between parties and other power-brokers to try to keep Pheu Thai at the helm.
Deputy premier Phumtham Wechayachai will be in charge as caretaker until a new prime minister is elected by parliament, which on Friday called a special session from September 3-5 but made no mention of a vote on a new premier.
Five people are eligible to become premier, with only one from Pheu Thai, 77-year-old Chaikasem Nitisiri, a former attorney general with limited cabinet experience, who has maintained a low profile.
Others include ex-premier Prayuth Chan-ocha, who has retired from politics and led a military coup against the last Pheu Thai government in 2014, and former deputy prime minister Anutin, who late on Friday said he already had the votes.
"This will be a government for the people, that will help find a way out for the country ... and return the power to the people," he said.
The ruling thrusts Thailand into more uncertainty, with potential for political deadlock at a time of simmering public unease over stalled reforms and a stuttering economy.
