The 35-year-old failed to add a two-shot penalty to his card after an incident on the eighth hole and European chief referee John Paramor confirmed that as a result, Dyson had been disqualified.
Paramor said in a statement on europeantour.com: "Simon Dyson has been disqualified from the BMW Masters presented by SRE Group under the rules of golf (6-6d). Simon was found to have breached rule 16-1a, which states that a player must not touch his line of putt.
"Television viewers alerted The European Tour to the incident, which took place on the eighth green during the second round, and when the footage was reviewed Simon was seen to touch the line of his second putt after marking and lifting his ball on the green.
"He subsequently failed to add a two-shot penalty to his score when signing his card, and as a result has now been disqualified."
Dyson had been in a tie for second, four shots behind Luke Guthrie, and his disqualification has dealt a huge blow to his chances of making the lucrative Race to Dubai finale.
Only the top 60 on the European Tour money list are eligible for the final event, with Dyson currently ranked 66th.
Dyson will now need to find success in the two remaining tournaments before the Dubai finale - the WGC-HSBC Champions and the Turkish Airlines Open - if he is to compete in the event.