"I had a meeting with him and told him he is no longer in the captain's group", the Mirror website quoted the Spaniard as telling reporters on Tuesday.
"He accepted my decision". We respect the players, we respect the decision of the coach and the club.
Emery explained, "We have a match tomorrow, a very important match for us in the Europa League and then on Saturday in that way we need to take some decisions about some circumstances that are happening".
Emery has now revealed that Pierre-Emerick Aubameyang will now be the captain in place of Xhaka.
Immediately following the incident against Palace, Emery said Xhaka was devastated about the row and hailed his commitment to the club in training and in games.
Emery has refused to give Xhaka - left out of the Gunners squad again for Wednesday's Europa League trip to Vitoria Guimaraes - any assurances over his long-term future at the Emirates.
Emery further reiterated that Aubameyang is the primary captain of the side, but Hector Bellerin, Alexandre Lacazette and Mesut Ozil are all vice-captains behind him in the pecking order.
"My feeling of not being understood by the fans, and repeated abusive comments at matches and in social media over the last weeks and months have hurt me deeply".
'But now the focus is tomorrow.
"We're speaking a lot about that".
Bellerin joined Emery for the press conference in the bowels of the Estadio D. Afonso Henriques ahead of the 15:50GMT kick-off on Wednesday.
The post went down well with these Arsenal fans, who were seemingly keen on a deal, with some even urging the club to consider a swap deal.
He faced the brunt of vocal criticism at Selhurst Park and also deleted his Twitter account for some time afterwards.
"That was the situation with me and, as you can imagine, it was obviously really hard for me back then. One day, you're at the top and another you're at a low".