Potter, 47, left Brighton to replace Thomas Tuchel at Stamford Bridge in September — becoming the first head-coaching hire under owner Todd Boehly. However, despite lavish spending in the January transfer window that included the arrival of record signing Enzo Fernandez, Potter was unable to improve fortunes at the club.
His last game in charge was the 2-0 home defeat to Aston Villa in the Premier League on Saturday.
“Chelsea FC has announced that Graham Potter has departed the club,” Chelsea said in a statement.
“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 quarterfinal 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.”
Potter came under criticism after he failed to get the best out of a squad that had been reinforced over two transfer windows as owners Boehly and Clearlake Capital spent more than €600 million ($650.76m) on new players.
Information from Reuters contributed to this report.