Mr Raab, who was appointed earlier this month, will be sidelined as Mrs May heads up the crunch withdrawal negotiations with the EU.
The Cabinet Office’s Europe Unit, which reports direct to the Prime Minister, will have “overall responsibility” for the exit talks, Mrs May said.
Pro-EU campaigners said the Prime Minister’s move, announced in Parliament today, was effectively a demotion for Mr Raab.
Liberal Democrat MP Layla Moran accused Mrs May of “launching a desperate attempt to take back control, two years late”.
She added: “It’s a demotion for Dominic Raab, we can all see that. The Prime Minister has shown how wafer-thin her confidence in the new Brexit Secretary is.
“We know the Brexit Department (DExEU) is a huge waste of money.
“Now we’re going to be wasting money on a whole department to prepare for the increasingly likely-no deal nightmare.”
Labour’s shadow Brexit Secretary Sir Kier Starmer tweeted: “That didn’t take long! Less than two weeks into the job…”
Shadow Brexit minister Jenny Chapman added: “Dominic Raab has been side-lined before he’s even had the chance to get his feet under the table.”
In a statement in Parliament last week, Mr Raab made clear he accepted his role as the PM’s deputy in negotiations with Brussels.
Asked whether he would be “calling the shots” in his new job, the Brexit Secretary said: “No, it is the Prime Minister and the Cabinet.
“I will be deputising for the Prime Minister in the negotiations.”
In a written statement to the Commons today, Theresa May spelt out how the change to operations will work.
She said the Brexit Department would “continue to lead on all of the Government’s preparations for Brexit” incluing planning for a no-deal Brexit.
She added: “I will lead the negotiations with the European Union, with the Secretary of State for Exiting the European Union deputising on my behalf.
“The Europe Unit will have overall responsibility for the preparation and conduct of the negotiations, drawing upon support from DExEU and other departments as required.
“A number of staff will transfer from DExEU to the Cabinet Office to deliver that.”