The announcement followed six days of protests in Cairo and other cities that have included demands for speedier change and faster trials of those behind the deaths of more than 840 demonstrators.
Egypt's Ruling Military Council has been increasingly targeted by protesters accusing it of failing to purge the system of Mubarak's allies or those behind police brutality.
In another apparent bid to placate critics, an army source said a parliamentary election could take place in November.
The Interior Ministry statement said 505 Generals and more than 160 other senior officers would end their service. It was not immediately clear if they were being fired or retiring.
"This movement (of people) is probably the biggest in the history of the police," Interior Minister Major General Mansour el-Essawy said, adding that 18 of the Generals were involved in trials over the killing of protesters.
Ministry spokesman General Marwan Mostafa said: "The Police Force shares with the people feelings of pain and hope. People involved in security are keen to do their role in protecting the revolution and look forward to a future of democracy."
Police were hated for the way they quashed even the smallest protest during Mubarak's rule and were reviled for using live ammunition, rubber bullets, batons and water cannon in the 18-day uprising that led to the President quitting on February 11.
Source: Reuters
