The Army says Brigadier General Janice Karpinski was found guilty of dereliction of duty, and, upon President Bush's approval, she was demoted to colonel.
However, the Army says no action or lack of action by General Karpinski contributed specifically to the abuse of detainees at Abu Ghraib.
General Karpinski is the highest-ranking U.S. officer to be punished in the wake of the prison scandal.
Earlier this week, a U.S. military judge threw out the guilty plea of Army Private First Class Lynndie England in connection with the scandal. Her case will now be sent back to military authorities for further consideration.