The mayor of Slavyansk, Vyacheslav Ponomarev – known for his bizarre press conferences, hoodies and baseball caps – has been sacked from his post and arrested.

In what appears to be part of a struggle inside Ukraine's separatist movement, Ponomarev was reportedly dismissed from his job on Tuesday. Ponomarev had been the public face of the rebel town for the past two months. In April he showed off eight European military observers kidnapped by Slavyansk's pro-Russian gunmen. The Europeans – later released – were among 40 hostages seized by Ponomarev's forces and held in an underground prison beneath the town's security services building.

On Tuesday, the military commander of the self-proclaimed Donetsk People's Republic, Igor Strelkov, announced that Ponomarev had been removed from his post. "The so-called people's mayor Ponomarev has been dismissed for engaging in activities incompatible with the goals and tasks of the civil administration. I cannot provide further details for now," Strelkov said on Facebook. The press service of the Donetsk People's Republic initially denied the arrest. On Wednesday reports suggested he was accused of misusing municipal funds.

It is unclear if Ponomarev is now locked up in the same underground prison with people he kidnapped. In a tearful interview the mayor's mother said her son had been detained on his way to work. "They came up to him in a white car and took him away. After that I couldn't get through to him. He didn't call. Then I read on the internet that he had been arrested. I went to the SBU [security service] building but they wouldn't let me in." Ponomareva said her son had merely "defended his city" and done nothing wrong.

Ukraine's pro-western government says that Strelkov – who is co-ordinating rebel operations against the Ukrainian army – is a Russian military intelligence agent from Moscow. There have been signs in recent weeks of growing tensions between local separatist leaders and more professional Russian "volunteers". Last month fighters from the Vostok battalion, including Chechens, seized control of the Donetsk People's Republic headquarters building in Donetsk. Some interpreted this move as an attempt by Moscow to bring under control a movement run by thugs and increasingly beset by PR disasters.

Ponomarev has denied any links with the Kremlin. Age 49, he first appeared in the media spotlight in April when he told reporters that Slavyansk's elected mayor had "fucked off", and that he was replacing her. When citizens asked him who he was he told them to be quiet and continued with his impromptu speech.

Previously little-known in Slavyansk, the "people's mayor" revealed he had served in the Soviet army in a "special operations unit" of the Arctic-based northern fleet and now owned a soap factory. During his time in charge he gave regular commentaries on hostages seized by the town's rebels including the US reporter Simon Ostrovsky, later freed, and numerous Ukrainian journalists, still in captivity.

Ponomarev came to international attention when he paraded the eight captured military observers at a press conference in Slavyansk's town hall. Ponomarev sat in the middle of the stage, flanked by four Germans, a Pole, a Dane, a Swede and a Czech. The senior officer, Colonel Axel Schneider, defended his mission to the region under the auspices of the Organisation for Security and Co-operation in Europe (OSCE). Ponomarev accused the group of being "Nato spies". He also memorably described Kiev's pro-western government as "oligarchs", "faggots" and a "junta" and vowed to kill Ukraine's defence minister Arsen Avakov, if he got the chance.