Grayson was a popular appointment amongst Leeds supporters and manage to steer the west Yorkshire club into the Championship although they missed out on the play-offs last season and look set to do the same this time around.
Chief executive Shaun Harvey said: “We have 18 games to go this season and are still within touching distance of the play-offs, but felt with the transfer window now closed we needed to make the change at this time in the belief that a new managerial team will be able to get more out of the existing squad of players and make the difference.
“Simon and his staff have given the club over three good years service and we would like to place on record our thanks and wish them all the best for the future. Current youth-team manager Neil Redfearn has been asked to take temporary charge of the first team until a new manager is available.”
Neil Warnock has been installed as the bookmaker favourite to replace Grayson, with Roberto Di Matteo and Gordon Strachan other names in the frame.