Clive Palmer has demoted Jacqui Lambie until the outspoken senator "gets her life back together".
But the Palmer United Party leader hopes the pair can soon reconcile their differences.
In a further escalation of their public spat, Mr Palmer on Wednesday removed Senator Lambie from the parliamentary positions of deputy PUP Senate leader and deputy whip.
The Tasmanian senator also has been suspended from attending party meetings, in what he described as a "very sad situation for Jacqui".
Senator Lambie, who has been engaged in a war of words with Mr Palmer, has dropped the PUP name and logo from her website.
There is speculation she could quit the party on Wednesday, even though Mr Palmer believes she fully believes everything PUP stands for.
"That's why she hasn't resigned, and we hope we can reconcile all those things in the coming days," he told Fairfax Radio.
But he said the party wouldn't sack the senator.
"When people are going through difficult times in the workplace you should stand by them," he said.
Mr Palmer denied his new party was unravelling, insisting it was "100 per cent united".
"It's just one person, one member out of thousands," he said.
Senator Lambie refused to comment about PUP's internal divisions when quizzed by reporters at Parliament House where she announced she was reversing her decision to back the government's controversial financial advice changes.
The decision puts her at odds with Mr Palmer and her party colleagues in the Senate.
"I found my way now," she said.
Since Monday, Senator Lambie has voted against all government legislation as part of her campaign to overturn a lower-than-inflation pay deal for military personnel.
PUP Senate leader Glenn Lazarus hopes Senator Lambie will stay in the party, despite her breaking contact with colleagues weeks ago.
"I love Jacqui, I think we get on really well," he told reporters.
"I'm just a bit bewildered about the fact that she won't talk to us."
Senator Lazarus defended Mr Palmer's handling of the crisis, despite the leader labelling Senator Lambie a "drama queen".
Independent senator David Leyonhjelm, who has held talks with Senator Lambie about forming a new voting block in the upper house, said she was still considering her future with PUP.
"Up to date I've regarded it as sort of a family fight where they fight like crazy and then make up," he said.
"It may be nothing more than that. But sometimes families break apart and never speak again."
