Potter has failed to inspire the needed turnaround since replacing Thomas Tuchel back in September.
A 2-0 home defeat to Aston Villa on Saturday left Chelsea in 11th position on the Premier League table, 12 points adrift the top four places with 10 matches left to play.
The 47-year-old took charge of 31 games during his short stay at Stamford Bridge, winning twelve and losing eleven.
Under Potter, Chelsea have been knocked out of both domestic cup competitions but are into the quarterfinals of the UEFA Champions League where they will face Real Madrid.
"Chelsea FC has announced that Graham Potter has departed the club," a statement read.
"Graham has agreed to collaborate with the Club to facilitate a smooth transition. In his time with the club, Graham has taken us to the quarter final of the Champions League, where we will face Real Madrid. Chelsea would like to thank Graham for all his efforts and contribution and wish him well for the future."
Speaking about Potter's sacking, a statement from Chelsea co-owners Todd Boehly and Behdad Eghbali said: "On behalf of everyone at the club, we want to thank Graham sincerely for his contribution to Chelsea.
"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.
"Along with our incredible fans, we will all be getting behind Bruno and the team as we focus on the rest of the season.
"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."
Bruno Saltor has been placed in interim charge beginning with Tuesday's Premier League home game against Liverpool.
