The decision was made during batting practice before the opener of a three-game series against the New York Yankees. Martinez, an All-Star catcher, was replaced by backup Kelly Shoppach, who batted eighth and went 0-for-4 in the Indians' 5-3 win.
Jhonny Peralta moved up from fifth in the lineup to Martinez's No. 3 spot and went 1-for-3 with a two-run home run.
Martinez has been one of the few dependable hitters for the slumping Indians. He was leading the AL with a .347 batting average, though he hadn't hit a home run and 27 of his 33 hits were singles. Team spokesman Bart Swain said Martinez was day to day.
Francisco was in the starting lineup Tuesday night, his first chance to play at Yankee Stadium.
"I'm looking forward to getting out there and experiencing that," he said before the game. "Obviously, it's a great atmosphere to play baseball in."
Francisco batted seventh, going 1-for4, and played left field.
With the Indians facing left-hander Andy Pettitte, manager Eric Wedge also started Jamey Carroll at second base in place of struggling Asdrubal Cabrera (.191), and Andy Marte at third instead of Casey Blake (.202).
Michaels was batting just .207, one of many Indians regulars stuck in an early-season hitting funk. Cleveland entered the Yankees series batting only .242 -- the second-lowest average in the AL -- and ranked near the bottom in every major offensive category.
The Indians have 10 days to trade, release or send Michaels outright to the minors. He had one hit in his last 21 at-bats.
"As strong as I feel about Jason Michaels," Wedge said, "that was not an easy move to make."
Francisco batted .346 in spring training but didn't make Cleveland's roster. He went 2-for-6 with a double and an RBI in his first stint with the Indians this season.
"He goes up there ready to hit," Wedge said.
Francisco was optioned to Buffalo on April 26 and recalled 10 days later.
"It's good to be back," he said. "It was a surprise, obviously. I'm excited to be here and ready to go."
Wedge said he's comfortable playing Francisco against right-handers, too.
"I think he does a couple of things for us," the manager explained. "He's versatile enough to where he can play anywhere in the outfield. ... I don't see him playing every day. We'll have to see where it goes. We're working on a lot of things right now."
General manager Mark Shapiro had to try something to spark his club.
"One move is not going to solve our offensive woes," he said. "Jason Michaels certainly wasn't the primary cause of them. When you have five to seven guys struggling, you can't make one or two moves and solve the problem. The answer has to come from within.
"Our primary focus is on getting the players here turned around and performing at the levels we expect them to perform at."
In other news, Wedge said injured closer Joe Borowski will throw a bullpen session in the next few days and is "not too far away" from returning to the mound.
"Just want him to get further into it before we start speculating," Wedge said.
Cleveland also agreed to a minor league contract with outfielder Bronson Sardinha, drafted 34th overall by the Yankees in 2001. He will report to Buffalo after going 10-for-31 (.323) with five RBIs for Seattle's Triple-A Tacoma farm club this year.
Information from The Associated Press contributed to this report.