Taoiseach Leo Varadkar has said he is "demoting" Fine Gael TD Maria Bailey.
She's being removed as chairperson of the Oireachtas housing committee, but will retain the party whip.
It comes after an internal inquiry into a personal injury claim.
Deputy Bailey brought a claim against the Dean Hotel after she claimed she fell from a swing in the hotel's restaurant in 2015.
Amid significant public criticism of the claim, the Dun Laoghaire TD withdrew her case in May.
She also faced widespread criticism, including from party colleagues, over a controversial RTÉ interview defending her claim.
Detailing the findings of a party inquiry, Mr Varadkar said the accident happened and Maria Bailey's injuries were real.
The investigation found the claim was not fraudulent.
However, the Taoiseach said: “Deputy Bailey signed an affidavit (linked to a personal injuries summons) that over-stated the impact of her injuries on her running.
"The inquiry concludes that it is unlikely that a court would conclude that she deliberately sought to mislead as other legal documents talk about her running being restricted rather than not being able to run at all.
“There have been inconsistencies in Deputy Bailey’s account of events to me and the media that I cannot reconcile."
Mr Varadkar said that it's clear Deputy Bailey made "numerous errors of judgement" in her handling of the matter - including after she'd withdrawn the case.
He added: “In not going further by removing the whip from Deputy Bailey, I do so conscious of the devastating effect this saga has had on Deputy Bailey and her family in particular.
"She has endured considerable negative publicity, public criticism and is now personally liable for significant legal and medical costs."
The Taoiseach said he hopes his actions will send a message to "other public representatives about taking such cases in future".
Maria Bailey's response
In a statement, Deputy Bailey said she accepted the Taoiseach's decision to remove her as committee chair.
She said she suffered "painful injuries" in the incident in Dublin, and acted on legal advice throughout the process.
The Dun Laoghaire TD said she decided to withdraw proceedings in a bid to end the "extraordinary media and political pressure" that followed details of the case being made public.
She said: "I began the process leading to the taking of this case before I was a TD, in relation to an incident that took place over four years ago.
"I regret very much that I took the case."
Deputy Bailey stressed that she made no attempt to mislead.
She added: “I recognise and regret the difficulties this issue caused for the Taoiseach and my colleagues during the recent elections.
"I want to express sincere thanks to members of my family, friends and colleagues who have been personally supportive of me during this recent period.”
Leo Varadkar also explained that he considered making the internal investigation public, but due to the cooperation of people on the basis of confidentially "it would be wrong of me to breach this confidence".
According to the Taoiseach, Fine Gael's Josepha Madigan - then a backbench TD and now a minister - gave "initial legal advice, guidance and assisted Deputy Bailey with her Personal Injuries Assessment Board (PIAB) application".
However, he notes that Minister Madigan did not deal with the subsequent legal proceedings, and they were instead handled by another solicitor in the firm.
Mr Vardakar's statement adds: "[Deputy Bailey] was advised that she had a ‘statable’ case.
"However, there were concerns that a finding of contributory negligence against her was likely and this was communicated to her on several occasions."