The decision was made after the Blues slipped to 11th place in the Premier League following their 2-0 defeat to Aston Villa on Saturday.
Potter had won just 12 of his 31 matches in charge, and Chelsea has won only three of their last 11 games.
The club’s new American owners, Todd Boehly and Behdad Eghbali, released a statement expressing their regret over the sacking of Potter.
“We have the highest degree of respect for Graham as a coach and as a person. He has always conducted himself with professionalism and integrity, and we are all disappointed in this outcome,” they said.
Former Brighton defender Bruno Saltor has been appointed as the interim coach of the club.
The owners have put their faith in Saltor to deliver results in their remaining Premier League fixtures and the quarterfinal of the Champions League.
“We have 10 Premier League games remaining and a Champions League quarter-final ahead. We will put every effort and commitment into every one of those games so that we can end the season on a high,” said the owners.
Chelsea season to forget
Chelsea has invested over £500 million ($616 million) in new signings this season. However, their results have not matched the financial investment, leading to their disappointing Premier League position.
Potter’s sacking comes just over a year after Thomas Tuchel was dismissed as Chelsea’s head coach.
Tuchel led the Blues to Champions League glory but was replaced after a poor start to the season.
The club’s focus now turns to the Champions League, with Chelsea facing defending champions Real Madrid in the quarterfinals.
An unlikely run to the club’s third European Cup now appears Chelsea‘s only route back into the Champions League next season as they sit 12 points adrift of the Premier League top four.
Saltor’s first game in charge will be on Tuesday when equally wounded Liverpool visit Stamford Bridge.